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20th  Century  Bookkeeping 


and 


Accounting 


A  TREATISE  ON  THE  PRINCIPLES  OF  ACCOUNTING  AND 

BOOKKEEPING  PRACTICE  APPLIED  BY  MODERN 

BOOKKEEPERS  AND  ACCOUNTANTS 


FIFTEENTH  EDITION 


FOR  USE  IN  ALL  SCHOOLS  THAT  TEACH  BOOKKEEPING 
AND  ACCOUNTING 


•V;S  v-  J  A-  M  e:  s  SA/i  S  a  k  ti  r 

ASSISTED       BY 

Coivi  ivi  ERCiAL    Teachers    amd     Prac-tici  no     Accou  m-taim-ts 


THE   DISCUSSION    IN   THIS   TEXT   AND   THE   TRANSACTIONS   IN    THE    PRACTICE    SETS    WHICH 

ACCOMPANY    IT    ARE    THE    RESULT   OF    SUGGESTIONS   RECEIVED   THROUGH   PERSONAL 

INTERVIEWS  AND  CORRESPONDENCE  WITH  THOUSANDS  OF  TEACHERS,  PRACTICING 

ACCOUNTANTS,   AND   BOOKKEEPERS,    DURING  TWENTY   YEARS'   ASSOCIATION 

WITH   THOSE   ENGAGED   IN   COMMERCIAL    WORK 


43262 


PUBLISHED  BY 

South-Western  Publishing  Co. 

Cincinnati,  O. 

1922 


Copyright,  19 12 
Copyright,  1922 

SOUTH-WESTERN  PUBLISHING  COMPANY 
Cincinnati,  Ohio 


5(o  35 


PREFACE 


The  successful  business  man  should  know  that  a  profit  will  result  from  the 
transactions  in  connection  with  his  business  before  they  are  completed.  To  deter- 
mine this  he  should  have  such  information  as  will  show  the  detailed  operating  cost, 
the  profit  from  trading  or  other  operations,  the  net  profit  for  each  fiscal  period, 
its  source,  and  the  increase  or  decrease  over  previous  periods. 

A  report  concerning  the  failure  or  suspension  of  a  business,  accompanied  by 
the  statement  that  the  creditors  will  not  know  what  percentage  of  their  claim  may 
be  collected  until  the  experts  have  audited  the  books,  indicates  that  the  manage- 
ment did  not  have  all  the  facts  available  in  connection  with  the  business.  Such 
a  statement  is  so  common  in  the  newspaper  announcement  of  failures  that  it  sug- 
gests a  connection   between  accounting  and  success. 

If  these  conditions  are  to  be  improved,  it  is  necessary  to  teach  the  correct 
principles  of  accounting  and  the  best  practice  in  applying  them.  The  bookkeeping 
student  of  today  is  the  bookkeeper  or  business  man  of  tomorrow.  If  he  has  a 
knowledge  of  the  correct  principles,  as  bookkeeper  he  will  apply  them,  or,  as 
manager,  he  will  see  that  they  are  applied  by  the  bookkeeper. 

The  purpose  of  this  text  is  to  present  the  correct  principles  of  bookkeeping 
and  accounting, — principles  advocated  and  practiced  by  modern  bookkeepers 
and  accountants.  The  information  upon  which  it  is  based  was  obtained  from 
standard  authorities  on  accounting  and  from  consultations  with  practicing  book- 
keepers and  accountants. 

The  text  is  prepared  primarily  for  the  student  and  not  for  the  practicing  book- 
keeper or  accountant.  The  presentation  permits  the  beginner  to  master  first  the 
simple  principles  of  accounting  as  applied  in  a  small  business.  When  he  under- 
stands these,  he  can  then  appreciate  the  more  complicated  principles  of  accounting 
necessary  in  recording  the  transactions  for  a  business  of  extensive  operations. 

A  study  of  the  text  would  result  in  only  a  theoretical  knowledge  of  the  subject. 
Practice  is  necessary  in  applying  the  principles.  A  correct  knowledge  of  the  prin- 
ciples is  essential,  but  efficiency  in  applying  this  knowledge  is  of  equal  importance. 
The  student  who  has  mastered  the  principles  of  bookkeeping  and  accounting 
should  have  also  acquired  accuracy,  neatness  and  speed.  For  this  reason  the 
practice  sets  require  the  recording  of  a  number  of  transactions, — a  sufHcient  num- 
ber to  impress  on  the  student's  mind  the  importance  of  a  correct  record  and  to 
give  him  confidence  and  skill  in  applying  his  knowledge  of  the  subject. 

That  the  student  may  learn  to  recognize  a  transaction  from  the  paper  that 
represents  it  in  business,  he  is  required  to  make  his  record  in  the  practice  sets 
from  reproduced  business  papers.  The  transactions,  moreover,  are  practical, 
and  identical  with  those  that  occur  in  business.  Applying  the  correct  principles 
and  recording  practical  transactions  represented  in  the  same  manner  as  they  are 
in  business,  gives  the  student  a  knowledge  of  the  subject  which  will  make  his  services 
desirable   to   the   business   man,   and   valuable   to   himself. 

Not  only  should  the  student  who  has  completed  a  course  in  bookkeeping  and 
accounting  understand  the  principles  of  the  subject  and  the  best  practice  in  ap- 


PREFACE 

plying  these  principles,  but  he  should  also  have  some  knowledge  of  the  efficient 
methods  employed  in  modern  business.  This  knowledge,  given  in  connection  with 
the  sets,  includes  special  ruling  in  all  books  of  original  entry,  carbon  copy  and  loose 
leaf  records,  controlling  accounts,  and  many  other  time-saving  methods  made 
popular  by  practicing  bookkeepers. 

Efficiency  in  office  routine  means  the  greatest  amount  of  work  with  the  best 
results  at  the  least  cost.  As  applied  to  the  work  of  the  bookkeeper,  it  means  the 
ability  to  record  the  greatest  number  of  transactions  with  correct  results  in  the 
least  possible  time.  Throughout  the  text  and  sets,  special  attention  is  given  to 
modern  methods  in  recording  transactions. 

The  student  who  has  mastered  the  principles  in  this  text  and  completed  the 
sets  that  accompany  it,  need  not  hesitate  to  accept  a  position  as  bookkeeper  in 
any  office.  He  can  rest  assured  that  the  training  received  will  have  prepared  him  to 
make  a  correct  record  in  an  efficient  manner.  If  the  work  of  his  predecessor  has  not 
been  correctly  done,  he  is  prepared  to  improve  the  method  in  use.  He  can  act 
with  the  assurance  that  the  work  he  does  will  be  approved  by  the  accountant 
who   audits    his   books. 

The  student  of  bookkeeping  will  soon  be  receiving  an  income,  hence  should 
know  the  connection  between  the  knowledge  gained  through  the  bookkeeping 
course  and  the  income  tax  statement  required  by  the  Government.  To  provide 
this  information,  practice  is  given  in  the  preparation  of  income  tax  statements. 
Information  in  regard  to  the  forms  is  given  in  an  appendix  because  these  forms 
will  be  changed  from  time  to  time  by  legislation.  The  student  who  understands 
the  principles  of  accounting  as  explained  in  this  text,  and  the  bookkeeping  practice 
illustrated  in  the  practice  sets,  will  find  the  preparation  of  an  income  tax  statement 
a  very  simple  problem. 

THE  PUBLISHERS. 


Part  One 

Chapter  I 

BUSINESS  AND  BOOKKEEPING 

The  Purpose  of  this  Chapter  is  to  introduce  the  student  to  the  subject 
of  bookkeeping  by  showing  him  its  purpose  through  an  explanation  of  business. 
There  are  many  reasons  why  the  student  should  understand  bookkeeping.  The 
business  man  will  pay  well  for  information  which  he  needs;  hence  the  one  who  can 
provide  this  information  through  a  knowledge  of  bookkeeping  will  command  a 
good  salary  for  his  services.  The  student  who  is  ambitious  to  become  a  business 
man  should  know  bookkeeping  because  this  knowledge  will  enable  him  to  interpret 
the  information  obtained  from  his  bookkeeping  records  and  to  use  it  as  a  basis  for 
future  operations  of  the  business. 

§  1.  Each  Individual  requires  food,  clothing,  education,  amusement,  and 
many  other  things  necessary  for  his  comfort  and  enjoyment.  These  necessities 
and  luxuries  can  be  obtained  with  money,  which  is  a  medium  of  exchange  and  the 
standard  of  value.  An  individual  secures  money  (a)  through  income  received  as 
wages  or  salary  for  services  he  has  rendered  to  others,  (b)  through  the  use  by  others 
of  property  which  belongs  to  him,  or  (c)  through  the  profit  resulting  from  the  oper- 
ations of  a  business  owned  by  him  either  in  part  or  as  a  whole. 

James  Brown  is  employed  as  salesman  for  the  Citizens  Motor  Car  Co.;  his  income  is  the  salary 
received  for  the  service  rendered.  J.  W  Smith  owns  the  building  in  which  the  Citizens  Motor  Car 
Co.  is  operated;  his  income  is  the  rent  received  for  the  use  of  the  building.  W.  O.  Winkler  owns 
the  Citizens  Motor  Car  Co.;  his  income  is  the  profit  made  by  selling  automobiles  at  a  price  greater 
than  the  cost. 

§  2.  A  Business.  The  one  who  sells  to  the  individual  the  food,  clothing, 
education,  amusement,  or  other  things  which  the  individual  needs  for  his  comfort 
and  enjoyment,  is  said  to  be  engaged  in  business,  and  the  operations  in  connection 
therewith  are  referred  to  as  business  transactions.  The  operations  include  the 
buying  and  selling  of  the  commodities  in  which  the  business  deals,  at  a  place  of 
business  and  imder  a  name  selected  by  the  owner.  There  are  many  kinds  of  busi- 
nesses, each  of  which  supplies  a  specific  demand;  there  are  many  businesses  of 
the  same  kind  which  undertake  to  supply  the  sam.e  demand. 

Robert  Brown  owns  and  operates  a  drug  store  at  405  Main  St.,  known  and  advertised  to  the 
public  as  "The  Central  Drug  Store."  Mr.  Brown  is  a  business  man  because  he  operates  a  business. 
The  operations  of  his  business  include  the  buying  and  selling  of  medicine  and  drugs,  as  well  as  the 
other  articles  a  drug  store  usually  handles,  and  his  business  is  referred  to  as  a  drug  business. 

§  3.  Assets,  Liabilities  and  Proprietorship.  If  the  owner  of  a  business 
is  to  have  ready  for  sale  the  merchandise  or  service  which  he  expects  to  sell,  he 
must  have  cash  with  which  to  purchase  this  merchandise  or  service.  The  cash, 
merchandise,  and  other  property  needed  to  carry  on  the  operations  of  a  business 
are  known  as  its  assets.  Should  the  owner  of  a  business  agree  either  in  writing 
or  verbally  to  pay  at  a  later  date  for  the  merchandise  or  service  purcha.sed,  he 
has  incurred  an  obligation  or  debt;  this  obligation  is  known  as  a  liability,  and 
all  the  obligations  of  the  business  are  known  as  its  liabilities.  The  liabilities  are 
to  be  paid  out  of  the  assets  of  the  business,  hence  the  owner's  interest  in  the  busi- 


6  BUSINESS  AND  BOOKKEEPING. 

ness  is  the  excess  of  total  assets  over  total  liabilities;    this  interest  is  known  as  his 
proprietorship.     vStated   in  equation   form,   assets  — liabilities  =  proprietorship. 

John  Jones,  who  has  $3,000.00  in  cash,  wishes  to  purchase  a  drug  store;  Robert  Brown,  who 
owns  and  operates  "The  Central  Drug  Store"  is  willing  to  sell  the  same  for  $2,500.00.  January  i, 
Mr.  Jones  pays  Mr.  Brown  $2,500.00  for  which  he  secures  all  the  assets  of  the  store;  these  include 
drugs,  medicine,  and  other  merchandise  usually  offered  for  sale  by  a  drug  store,  and  a  soda  fountain 
with  the  usual  equipment.  He  retains  the  $500.00  for  the  purpose  of  buying  other  drugs.  If  this 
$500.00  is  not  sufficient  to  pay  for  the  drugs  purchased  and  these  drugs  are  sold  to  him  upon  his 
promise  to  pay  later,  he  incurs  a  liability.  During  the  operations  of  the  business  his  interest  in  the 
business  is  the  value  of  all  the  assets  belonging  to  the  business  less  the  liabilities. 

§  4.  The  Name  of  an  Asset  or  a  Liability  depends  on  its  nature.  Custom 
has  fixed  the  names  of  the  assets  which  usually  belong  to  a  business  and  the  liabilities 
which  are  usually  incurred.  Money  is  referred  to  as  "cash;"  written  promises- 
(in  negotiable  form)  of  those  who  agree  to  pa^^  money  to  the  business,  as  "notes 
receivable,"  and  verbal  promises,  as  "accounts  receivable;"  merchandise  in  stock, 
as  "inventory;"  fixtures  used  in  the  business,  as  "furniture  and  fixtures;"  written 
promises  (in  negotiable  form)  of  the  business  to  pay  money  at  a  future  date,  as 
"notes  payable;"    and  verbal  promises,  as  "accounts  payable." 

§  5.  Cost  and  Income.  When  a  business  is  organized,  the  ow^ner  expects 
to  purchase  the  merchandise  or  other  property  which  he  sells,  also  to  pay  rent, 
salaries,  advertising,  etc. ;  these  are  known  as  costs. .  Th'e  owner  of  the  business 
also  expects  to  sell  the  merchandise  or  service  which  he  offers  for  sale;  the  returns 
from  sales  are  known  as  income.  If  the  income  be  greater  than  the  cost,  the  busi- 
ness has  been  operated  at  a  profit;  if  the  income  be  less  than  the  cost,  it  has  been 
operated  at  a  loss. 

When  Mr.  Jones  bought  the  drug  business,  he  knew  there  would  he  certain  costs  in  connec- 
tion with  its  operations,  including  rent,  salaries,  telephone  service,  purchases  of  merchandise,  supplies 
for  the  soda  fountain,  etc.  However,  he  was  willing  to  assume  these  costs  because  he  expected  an 
income  from  the  sales  of  merchandise  which  he  purchased  and  from  the  products  of  his  soda  foun- 
tain. If  at  the  end  of  the  first  year  his  costs  amount  to  $4,000.00  and  his  sales  to  $5,000.00,  he  will 
have  made  a  profit  of  $1,000.00  through  owning  and  operating  the  drug  business. 

§  6.  The  Name  of  Each  Cost  and  Income  depends  on  its  nature.  It  is 
quite  evident  that  cost  for  rent  and  cost  for  merchandise  purchased  are  of  an  en- 
tirely different  nature;  also  that  the  income  from  the  sale  of  merchandise  and  the 
income  from  the  sale  of  service  are  of  a  different  nature.  Custom  has  fixed  the 
names  of  the  costs  and  income  w^hich  occur  in  the  usual  operations  of  the  business. 
Rent  and  salary  costs  are  known  as  "expenses;"  merchandise  purchased  for  sale, 
as  "purchases;"  income  from  the  sale  of  this  merchandise,  as  "sales;"  income 
from  the  use  of  money,  as  "interest;"  income  from  the  sale  of  services  such  as 
that  rendered  by  telephone  and  telegraph  companies,  as  "tolls;"  and  income 
from  the  sale  of  service  rendered  by  a  street  railway  company,  as  "passenger  re- 
ceipts." 

§  7.  A  Business  Transaction  is,  theoretically.,  an  exchange  of  equivalent 
values;  that  is,  the  business  receives  an  equivalent  value  for  the  material  or  service 
which  it  sells  to  others,  and  gives  an  equivalent  value  for  the  material  or  service 
which  it  purchases.  Because  of  this  exchange  of  values,  each  transaction  will 
result  in  a  parting  with  values  by  the  business  with  a  resulting  increase  of  liabilities 
or  income;  and  a  corresponding  receipt  of  value  with  a  resulting  increase  of  assets 
or  cost. 

Mary  Davis  pays  John  Jones,  the  owner  of  The  Central  Drug  Store,  25c  for  a  magazine;  this 
is  a  transaction  performed  by  the  owner  because  he  receives  cash  and  parts  with  a  magazine.  James 
Doyle  pays  the  street-car  conductor  a  fare  of  8c;  this  is  a  transaction  performed  by  the  street-car 
company  because  it  receives  8c  cash  for  service  it  has  rendered. 


BUSINESS  AND  BOOKKEEPING.  7 

§8.  Bookkeeping  is  the  systematic  recording  of  the  transactions  of  a  busi- 
ness, or  of  any  changes  which  may  affect  the  owner's  interest  in  the  business.  This 
record  is  made  (i)  by  writing  the  date,  explanation,  and  amount  of  each  transac- 
tion; (2)  by  classifying  the  items  of  the  record  to  show  values  received  (assets 
arid  costs),  and  values  parted  with   (liabilities  and  income). 

The  term  "accounting"  in  the  title  of  this  text  is  usually  used  with  the  same  meaning  as  book- 
keeping. However,  there  is  a  technical  difference  which  will  be  explained  later.  No  attempt  is 
made  to  explain  everything  about  bookkeeping  and  accounting  at  the  beginning,  because  it  would 
only  result  in  confusion,  and  the  student  can  better  learn  as  he  advances. 

§  9.  The  Purpose  of  Bookkeeping  for  a  Business  is  to  provide  a  record 
of  all  transactions  performed  by  the  business.  The  owner  of  the  business  needs 
this  information  in  order  that  he  may  know  the  value  of  the  assets  and  liabilities 
of  the  business,  and  the  cost  and  income  resulting  from  its  operations.  The  in- 
formation gained  through  the  operations  of  the  business  in  the  past  can  be  of  value 
to  the  owner  in  connection  with  the  performance  of  future  transactions  only  when 
he  has  a  complete  record  of  the  transactions  performed. 

§  10.  The  Purpose  of  Bookkeeping  for  an  Individual  whose  income 
results  from  a  salary  or  an  investment  is  the  same  as  for  a  business — that  is,  to 
assist  the  individual  to  better  control  his  income  and  expenditures.  If,  at  the  end 
of  each  year,  the  individual  knows  his  total  income  for  the  year  and  his  expenses 
for  the  year,  he  will  be  in  a  far  better  position  to  control  future  expenditures 
than  if  he  depends  on  the  information  obtained  from  an  actual  count  of  the  assets 
he  has  remaining  at  the  end  of  the  year.  The  individual  who  has  money  invested 
in  property  should  record  the  cost  of  the  property,  the  cost  of  taxes,  insurance, 
repairs,  etc.,  and  the  income  from  rent;  with  this  information  he  can  determine 
whether  his  investment  is  profitable. 

The  individual  whose  income  is  a  salary  can  better  control  his  expenditures  by  making  ap- 
propriations for  those  expenditures  which  he  knows  will  occur,  such  as  rent,  food,  clothing,  amuse- 
ments, contributions,  etc;  this  will  enable  him  to  avoid  spending  more  for  any  one  of  these 
items  than  his  salary  will  permit.  This  plan  of  making  appropriations  is  referred  to  as  a  "budget 
system,"  and  the  list  of  appropriations,  as  a  "budget."  The  budget  system  is  not  only  applicable 
to  the  affairs  of  an  individual,  but  is  also  applicable  to  the  affairs  of  a  government  and  a  business 
concern.  City,  county,  state,  and  national  governments  are  rapidly  adopting  the  budget  system 
for  the  control  of  expenditures,  and  many  business  concerns  make  expenditures  for  advertising, 
salaries,  improvements,  etc.,  through  a  system  of  budgetary  control. 

§  11.  Summary.  The  student  needs  to  know  bookkeeping  because  a 
knowledge  of  the  subject  will  increase  the  value  of  his  services,  whether  sold  to 
others  or  used  in  connection  with  his  own  business.  Income  can  be  earned  through 
a  salary  received,  an  investment,  or  the  operations  of  a  business.  A  business  man 
is  one  who  undertakes  to  provide  services  or  commodities  for  which  there  is  a  de- 
mand. Assets  are  needed  in  connection  with  the  operations  of  a  business,  and 
liabilities  may  be  incurred.  The  proprietorship  of  a  business  is  the  value  of  the 
assets  after  the  liabilities  are  deducted.  Cost  refers  to  expenses  and  purchases 
made  necessary  in  order  that  the  business  man  may  have  an  income  through  the 
sales  of  merchandise  or  services.  A  business  transaction  is  an  exchange  of  equiva- 
lent values;  each  value  involves  an  asset,  a  liability,  a  cost,  or  an  income.  These 
transactions  are  recorded  in  order  that  the  owner  of  the  business  may  have  a  record 
of  them.  This  record  is  made  by  writing  the  date  of  the  transaction,  the  name 
of  the  asset,  liability,  cost  or  income,  and  the  value  received  and  the  value  parted 
with.     Every  transaction  affects  an  asset  or  an  income  and  a  liability  or  a  cost. 


I  BUSINESS  AND  BOOKKEEPING. 

QUESTIONS 

1.  What  is  the  purpose  of  bookkeeping? 

2.  Is  it  advisable  for  a  person  who  receives  a  salary  for  his  services  to  keep  a 

record  of  the  transactions  which  he  performs  in  connection  with  his  affairs? 

3.  Name  some  of  the  transactions  which  the  individual  would  perform  in  con- 

nection with  his  affairs. 

4.  Would  you  think  it  advisable  for  a  person  who  receives  a  salary  to  appropriate 

fixed  amounts  for  living  expenses,  clothing,  charity,  and  savings?     State 
reasons  for  answer. 

5.  Would  it  be  advisable  for  the  owner  of  an  apartment  building  with  six  apart- 

ments to  keep  a  record  of  the  transactions  performed  in  connection  with 
the  operation  of  the  building?     Why? 
Name  some  of  the  transactions  which  the  owner  of  the  apartment  building 
would  perform. 

How  would  he  ascertain  whether  the  ownership  of  the  apartments  was  a  profit- 
able investment? 

Would  you  consider  a  contractor  who  undertakes  to  build  houses,  roads, 
sidewalks,  etc.,  a  business  man?     Why? 

Name  some  of  the  transactions  which  he  would  perform  in  connection  with 
the  operations  of  his  business. 

10.  Is  the  payment  of  street  car  fare  by  the  individual  who  rides  on  the  car  a 

business  transaction  from  the  standpoint  of  the  street  car  company? 

11.  Name  some  of  the  assets  which  would  be  needed  and  some  of  the  liabilities 

which  might  be  incurred  in  connection  with  the  operation  of  a  railroad. 

12.  Name  some  of  the  assets  and  liabilities  in  connection  with  the  operation  of  a 

grocery  business. 

13.  Would  you  consider  it  advisable  for  those  in  charge  of  a  city  government  to 

make  a  record  of  the  transactions  completed  in  connection  with  its  oper- 
ations?    Why? 

14.  Name  some  of  the  transactions  which  would  be  recorded  in  connection  with 

the  operations  of  a  city  government. 

15.  Is  an  automobile  truck,  owned  and  used  by  the  grocer  for  delivering  groceries, 

one   of    the   assets   of   his    business? 

16.  Name  some  of  the  operating  costs  in  connection  with  the  operations  of  a 

steamer  which  carries  freight  and  passengers. 

17.  Name  some  of  the  assets  which  would  be  needed  and  the  liabilities  incurred 

in  connection  with  the  operations  of  this  steamer. 

18.  Name  some  of  the  operating  costs  in  connection  with  the  publication  of  a 

daily  newspaper. 

19.  Name  some  of  the  assets  and  liabilities  in  connection  with  the  operations  of  a 

newspaper. 

20.  Is  the  farmer  engaged  in  operating,  a  business? 

21.  Name  some  of  the  transactions  which  would  occur  in  connection  with  the 

operations  of  a  farm. 

22.  Name  some  of  the  assets  needed  by  the  farmer  and  some  of  the  liabilities  he 

might  incur  in  connection  with  the  operations  of  his  farm. 

23.  Name  some  of  the  operating  expenses  which  it  would  be  necessary  for  the 

farmer  to  pay  in  connection  with  the  operations  of  his  farm. 

24.  Name  some  of  the  transactions  which  a  physician  would  perform  in  connection 

with  his  practice. 

25.  Name  three  businesses  of  the  same  kind.     Name  three  businesses  of  different 

kinds. 


Chapter  II 

RECORDING  TRANSACTIONS 

The  Purpose  of  this  and  the  three  succeeding  Chapters  is  to  explain  (a) 
the  method  of  recording  transactions  in  accounts  with  Cash,  Purchases,  Sales, 
persons,  Expense,  and  the  proprietor,  (b)  the  use  of  the  general  journal,  (c)  the 
use  of  special  journals,  and  (d)  the  Trial  Balance.  Exercises  consisting  of  business 
transactions  which  have  been  performed  are  provided  in  order  that  the  student 
may  obtain  practice  in  applying  the  principles  discussed  in  the  text. 

§  12.  An  Account  is  a  systematic  record  of  all  the  transactions  with  any- 
one asset,  liability,  cost  or  income  collected  under  a  specific  title;  this  title  is  the 
name  of  the  asset,  liability,  cost  or  income.  The  ruled  form  for  an  account  should 
contain  two  sides  (Illustration  No.  i),  one  to  show  the  date  of  the  transaction 
and  the  value  received,  and  the  other  the  date  of  the  transaction  and  the  value 
parted  with.  The  balance  of  an  account  is  the  difference  between  the  totals  of 
the  two  sides.  An  account  is  "open"  when  the  totals  of  the  two  sides  are  not 
equal,  and  "in  balance"  when  the  totals  are  equal. 

Illustrations  Nos.  i,  2,  3  and  8  in  this  chapter  illustrate  and  explain  the  form  of  an  account. 
Illustration  No.  3  shows  that  at  least  two  accounts  are  required  to  record  each  transaction. 


NAME  OF  THE  ACCOUNT 


Values  Received 


Values  Parted  With 


Year 

'  Year 

Month  Day 

Explanation 

Page 

Dollars 

Cents 

Month  Day 

Explanation 


Page 


Dollars]  Cents 


Illustration  No.  i,  The  Account. 

§  13.  Debit  and  Credit  when  used  as  bookkeeping;  terms,  describe  the  two 
sides  of  an  account;  debit  refers  to  the  left  side  and  credit  to  the  right  side.  The 
value  received  in  a  transaction  is  recorded  on  the  debit  (left)  side  of  one  account, 
and  the  value  parted  with  on  the  credit  (right)  side  of  another  account. 

§  14.  The  Ledger  is  a  bound  book,  loose-leaf  book,  or  cards,  with  rulings 
to  contain  a  record  of  transactions  in  account  form;  Illustration  No.  2  shows  a  ruled 
ledger  page.  The  name  of  the  account  is  written  across  the  page,  and  each  transac- 
tion recorded  on  the  opposite  sides  of  two  accounts,  as  in  Illustration  No.  3  which 
shows  a  ledger  with  three  accounts. 

The  number  of  accounts  in  the  leds^er  depends  entirely  on  the  nature  of  the  operations  of  the 
business,  and  the  extent  of  these  operations.  The  space  required  for  recording  transactions  in  any 
one  account  depends  on  the  number  of  transactions  which  affect  the  account;  this  space  is  deter- 
mined by  one  who  is  familiar  with  the  nature  of  the  business  and  the  transactions  performed  by  it. 


Illustration  No.  2,  One  Form  of  Ruling  for  a  Ledger. 

9 


10  CASH,  PURCHASES  AND  SALES  ACCOUNTS. 

CASH  ACCOUNT 

§  15.  The  Purpose  of  this  Account  is  to  show  the  amount  of  cash  belong- 
ing to  the  business  as  a  result  of  the  transactions  in  which  cash  is  received  and 
paid.  '"Cash"  is  a  term  applied  to  money  or  any  commercial  paper  which  the 
bank  will  accept  at  its  face  value  as  money.  The  various  forms  of  commercial 
paper  which  are  regarded  as  cash  will  be  explained  and  illustrated  later. 

Debit  the  Cash  Account:  Credit  the  Cash  Account: 

11  I.     For  cash  received.  H  2.     For  cash  paid. 

^  3.  The  Balance  of  the  Cash  Account  shows  the  amount  of  cash  which 
belongs  to  the  business  as  a  result  of  the' cash  transactions  completed;  it  is  one  of 
the  assets  of  the  business.  This  cash  may  be  in  the  safe,  in  the  bank  for  safe- 
keeping, or  a  part  in  each  place.     (See  Illustration  No.  3.) 

There  are  four  important  points  relating  to  each  account  which  the  student  should  under- 
stand: (a)  its  purpose,  (b)  the  transactions  to  be  recorded  on  the  debit  side,  (c)  the  transactions 
to  be  recorded  on  the  credit  side,  and  (d)  the  interpretation  of  its  balance — that  is,  whether  it  repre- 
sents an  asset,  a  liability,  a  cost,  or  an  income.  The  discussion  of  each  account  in  this  text  is 
arranged  so  as  to  emphasize  these  four  points.  "^ 

§  16.  Proving  Cash.  Since  the  Cash  account  is  a  record  of  all  cash  received 
and  paid,  the  balance  should  be  the  same  as  the  cash  belonging  to  the  business. 
Cash  is  proved  by  counting  the  cash  and  comparing  the  amount  with  the  balance 
of  the  Cash  account.  If  there  has  been  an  error  in  making  change,  or  a  transaction 
affecting  cash  has  not  been  recorded,  it  is  obvious  that  the  balance  of  the  account 
will  not  be  the  same  as  the  cash  on  hand. 

PURCHASES  ACCOUNT 

§  17.  The  Purpose  of  this  Account  is  to  show  the  net  cost  of  all  the  mer- 
chandise purchased  for  sale.  Merchandise  is  a  general  term  applied  to  goods 
bought  and  sold  in  the  trading  business,  such  as  groceries,  clothing,  shoes,  hats, 
hardware,  drugs,  musical  instruments,  jewelry,  etc. 

Debit  the  Purchases  Account:  Credit  the  Purchases  Account: 

\  I.     For    the    cost    of    merchandise  ^  2.     For  the  cost  price  of  merchan- 

purchased,  and  the  transporta-  dise    returned    to    the    seller, 

tion  (freight,  express,  and  post-  and    allowances    granted    by 

age),    drayage,    and    storage  him. 
cost  of  this  merchandise. 

\  3.  The  Balance  of  the  Purchases  Account  shows  the  net  cost  of  merchandise 
purchased  during  the  period  for  which  the  record  is  kept;  it  is  one  of  the  costs  ot 
the  business.  This  balance  will  not,  as  a  rule,  represent  the  value  of  the  merchandise 
owned  by  the  business  because  the  merchandise  was  purchased  for  sale  and  a  part 
of  it  hasvprobably  been  sold.     (See  Illustration  No.  3.) 

SALES  ACCOUNT 

§  18.  The  Purpose  of  this  Account  is  to  show  the  net  returns  from  the 
sales  of  merchandise.  It  is  a  record  of  the  transactions  affecting  the  sales  of  those 
articles  purchased  for  sale,  the  cost  of  which  is  charged  to  the  Purchases  account. 

Debit  the  Sales  Account:  Credit  the  Sales  Account: 

%  I.     For  the  selling  price  of  merchan-  If  2.     For  the  selling  price  of  merchan- 
dise returned  by  the  customer,  dise  sold, 
and  allowances  granted  to  him. 

^  3.  The  Balance  of  the  Sales  Account  shows  the  net  returns  from  the  sales 
of  merchandise  during  the  period  for  which  the  record  is  kept;  it  is  one  of  the  in- 
comes of  the  business.     (See  Illustration  No.  3.) 


RECORDING  TRANSACTIONS  IN  THE  LEDGER. 


II 


RECORDING  TRANSACTIONS  DIRECT  IN  THE  LEDGER 

§  19.  Transactions  are  Recorded  in  the  order  in  which  they  occur.  The 
record  may  be  made  direct  in  the  ledger  or  in  a  separate  book  and  transferred  to 
the  ledger.  Illustration  No.  3  shows  the  method  of  recording  direct  in  the  ledger 
the  transactions  outlined  below  and  at  the  top  of  page  12.  The  transactions  are 
those  relating  to  the  sales  and  purchases  of  merchandise  for  cash  performed  by 
the  soda  fountain  department  of  The  Central  Drug  Company  during  the  week 
beginning  July  2. 

July  2.     Cash  sales  for  the  day  per  cash  register,  $39.40. 

Recorded  in  Illustration  No.  3  on  the  debit  side  of  the  Cash  account  and  credit  side  of 
the   Sales  account. 

3.     Bought  syrups  and  extracts,  $5.00;  Coca-Cola,  $12.75;  ice  cream,  $19.20. 

Recorded  in  Illustration  No.  3  on  the  debit  side  of  the  Purchases  account  and  credit 
side    of   the    Cash    account. 
Cash  sales  for  the  day  per  cash  register,  $50.30. 
Recorded  in  Illustration  No.  3  on  the  debit  side  of  the  Cash  account  and  credit  side  of 
the  Sales  account. 
5.     Returned  one  gallon  of  ice  cream  purchased  on  the  3d,  and  received  $2.50, 
the  cost  price,  for  the  same. 
Recorded  in  Illustration  No.  3  on  the  debit  side  of  the  Cash  account  and  credit  side 
of    the    Purchases    account. 
Bought  sandwiches.  $12.50;    flavoring,  $16.40;    ice  cream,  $20.00. 
Recorded  in  Illustration  No.  3  as  explained  in  §  17,   II  i  and   §  15,   ^  2. 
{Concluded  on  page  12) 


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Illustration  No.  3,  A  Ledger  Containing  Three  Accounts. 

EXPLANATION.     The  information  given  in  connection  with  each  transaction  and  the  method 
of  recording  it  is  sufficient  explanation  of  this  illustration. 


12 


THE  TRIAL  BALANCE. 


{Continued  from  page  ii.) 
July  6.     Cash  sales  for  the  day  per  cash  register,  $21.50. 

Recorded  in  Illustration  No.  3  as  explained  in  §  15,   *!  i  and  §  18,   H  2. 

7.     Gave  James  Smith  $1.50  for  one-half  gallon  of  ice  cream  which  he  re- 
turned because  it  was  received  in  bad  condition. 

Recorded  in  Illustration  No.  3  as  explained  in   §  18,   K  i  and   §  15,   ^  2. 

Cash  sales  for  the  day  per  cash  register,  $62,50. 

Recorded  in  Illustration  No.  3  as  explained  in   §  15,   ^  i  and   §  18,   H  2. 

§  20.  A  Trial  Balance  is  a  list  of  the  open  accounts  in  the  ledger  with  the 
balance  or  the  total  debits  and  total  credits  set  opposite  the  name  of  each  account; 
its  purpose  is  to  test  the  equality  of  the  debits  and  credits  recorded  in  the  ledger. 
The  Trial  Balance  is  usually  prepared  on  paper  with  two  money  columns  ruled  at 
the  right  so  that  the  debit  totals  or  debit  balances  may  be  entered  in  one  column, 
and  the  credit  totals  or  credit  balances  in  the  other.  The  test  is  satisfactory  when 
the  total  of  the  debit  column  on  the  Trial  Balance  equals  the  total  of  the  credit 
column.  Illustration  No.  4  shows  a  Trial  Balance  of  totals,  and  No.  5  a  Trial 
Balance  of  balances  prepared  from  the  ledger  in  Illustration  No.  3. 


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Illustration  No.  4,  A  Trial  Balance  of  Totals. 

EXPLANATION.  This  Trial  Balance  is  prepared  from  the  ledger  in  Illustration  No.  3. 
The  page  in  the  ledger  and  the  name  of  each  account  are  written  at  the  left,  and  the  total  debits 
and  total  credits  are  written  in  the  two  money  columns  at  the  right.  If  the  Trial  Balance  is  footed 
before  it  is  ruled,  the  totals  are  entered  in  small  pencil  figures  in  the  same  manner  as  the  totals  in 
Illustration  No  3.  By  comparing  Illustration  No.  4  with  Illustration  No.  3,  the  student  will  observe 
that  it  is  necessary  to  add  the  accounts  in  the  ledger  and  write  the  totals  in  small  pencil  figures  before 
preparing  the  Trial  Balance. 


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Illustration  No.  5,  A  Trial  Balance  of  Balances. 

EXPLANATION.  It  is  customary,  when  taking  a  Trial  Balance  of  balances,  to  write  the 
balance  in  the  explanation  column  on  the  larger  side  of  the  account  in  the  ledger.  These  balances 
are  not  shown  in  Illustration  No.  3  because  they  are  not  necessary  in  taking  a  Trial  Balance  of  totals. 


RECORDING  TRANSACTIONS  IN  THE  LEDGER.  13 

Exercise  No.  1,  Recording  Transactions  Direct  in  the  Ledger. 

Record  on  ledger  paper*  (paper  with  the  same  ruHng  as  lUustration  No.  2) 
the  following  transactions  performed  during  the  month  of  January  by  J.  W. 
McCormick,  a  dealer  in  musical  instruments.  Write  the  names  of  the  three 
accounts  before  recording  the  transactions;  allow  twelve  lines  for  Cash,  eight 
lines  for  Purchases  and  twelve  lines  for  Sales.  The  space  given  for  each  account 
includes  suificient  lines  for  recording  the  transactions  and  one  line  for  the  name 
of  the  account.  If  one  sheet  of  ledger  paper  is  used  for  the  three  accounts,  separate 
them  by  double  red  lines  as  in  Illustration  No.  3. 

In  practice,  transactions  are  recorded  separately  from  the  ledger  and  transferred  to  it,  but 
for  the   purpose   of  instruction  the    first   few   exercises  are  recorded  direct  in   the   ledger. 

Jan.     I.     Sold  for  cash  one  piano,  $450.00. 

Record  on  the  debit  side  of  the  Cash  account  and  on  the  credit  side  of  the  Sales  account 
in  the  same  manner  as  the  transaction  for  July  2  is  recorded  in  Illustration  No.  3. 

2.     Bought  for  cash  one  hundred  Victrola  records,  $110.00. 

Record  on  the  debit  side  of  the  Purchases  account  and  on  the  credit  side  of  the  Cash 
account  in  the  same  manner  as  the  first  transaction  for  July  3  is  recorded  in  Illus- 
tration No.  3. 
5.     Sold  for  cash  one  Victrola,  $225.00;   records,  $10.50. 

Record  in  one  amount  on  the  debit  side  of  the  Cash  account  and  on  the  credit  side  of 
the  Sales  account  in  the  same  manner  as  the  second  transaction  for  July  3  is  recorded 
in    Illustration    No.    3. 
7.     Sold  for  cash  one  piano,  $350.00. 

10.     Sold  for  cash  one  player-piano,  $500.00;   rolls,  $22.50. 
12.     Bought  for  cash  three  Victrolas,  $320.00;  paid  freight  on  the  same,  $52.50. 
14.     Sold  for  cash  one  Victrola,  $200.00;  records,  $42.50. 

17.  Gave  J.  O.  Smith  $1.50  for  a  damaged  record  which  he  purchased  on  the 

14th  and  returned. 

Debit    §18,    ^i;     credit    §15,    ^\  2. 

18.  Sold  for  cash  one  Victrola,  $50.00;   records,  $6,50. 

20.     Bought  for  cash  one  piano,  $225.00;    paid  freight  and  drayage  on  the 

same,  $42.65 
23.     Sent  the  damaged  record  returned  to  us  on  the  17th  to  the  distributing 

agent  of  the  records  and  received  90c  for  the  same. 

Debit   §  15,   ^  i;    credit   §  17,   ^  2. 

27.     Sold  for  cash  one  Victrola,  $75.00;   records,  $10  50. 

Bought  for  cash  one  piano,  $300.00;    paid  freight  on  the  same,  $48.65. 

30.  Received  $3.50  from  the  railroad  company  to  pay  for  overcharge  on 

freight  paid  on  the  20th. 
Debit    §  15,    5[  i;     credit    §  17,    ^2. 

31.  Sold  for  cash  one  piano,  $350.00. 

When  these  transactions  have  been  recorded  in  the  three  accounts,  add  the 
debit  side  and  the  credit  side  of  each  account,  enter  the  totals  in  small  pencil  figures 
as  in  Illustration  No.  3,  and  prove  the  equality  of  the  debits  and  credits  by  a  Trial 
Balance  of  totals  as  in  Illustration  No.  4.  • 

Exercise  No.  2,  Recording  Transactions  Direct  in  the  Ledger. 

Record  on  ledger  paper*  the  following  transactions  performed  during  the  week 
beginning  May  28  by  Charles  Smith,  a  butcher.     Allow  space  for  the  accounts  as 
follows:    Cash,  ten  lines;    Purchases,  eight  lines;   Sales,  nine  lines. 
May  28.     Cash  sales  for  the  day  per  cash  register,  $42.85. 

{Concluded  on  page  14) 

*NOTE.  The  exercises  in  the  text  are  not  to  be  recorded  in  the  books  of  account  provided 
for  the  practice  set.  Unless  special  blanks,  marked  "For  Exercises  in  the  Text,"  are  provided,  the 
student  should  use  loose  sheets  of  ruled  paper.  Present  exercises  for  approval  as  directed  on  the 
direction  card  or  as  directed  bv  the  instructor. 


14  BOOKS  OF  ORIGINAL  ENTRY 

Exercise  No.  2 — {Continued  from  page  ij.) 
May  29.     Bought  meat  for  cash,  $22.50. 

Cash  sales  for  the  day  per  cash  register,  $35.60. 

30.  Paid  the  express   company   $20.00,    $18.75   of   which   was   for  a   cash 

purchase  of  lard  and  $1.25  for  express  charges  on  the  same. 
Cash  sales  for  the  day  per  cash  register,  $45.25. 

31.  Gave  Mrs.  R.  K.  Polk  $1.10  cash  for  a  steak  which  she  returned  because 

it  was  not  satisfactory. 
June   I.     Bought  meat  for  cash,  $57.50. 

Cash  sales  for  the  day  per  cash  register,  $49.90. 
2.     Received  $3.50  from  the  Central  Provision  Co.  for  lard  which  we  returned 
as  per  agreement. 
Bought  meat  for  cash,  $36.40. 
Cash  sales  for  the  day  per  cash  register,  $72.19. 
When  these  transactions  have  been  recorded  in  the  three  accounts,  add  the 
debit  side  and  the  credit  side  of  each  account,  enter  the  totals  in  small  pencil  figures, 
and  prove  the  equality  of  the  debits  and  credits  by  a  Trial  Balance  of  totals  as  in 
Illustration  No.  4. 

Exercise  No.  3,  Recording  Transactions  Direct  in  the  Ledger. 

Record  on  ledger  paper  the  following  transactions  performed  during  the  week 
beginning  September  15  by  Shepherd  Young,  who  conducts  the  Central  Cafeteria. 
Allow  space  for  the  accounts  as  follows:  Cash,  eleven  lines;  Purchases,  nine  lines; 
Sales,  ten  lines. 

Sept.   15.     Paid  cash  for  meat,  $25.50;   bread,  $4.75. 
Received  for  cash  sales,  $37.55. 

16.  Paid  cash  for  vegetables,  $12.80. 
Received  for  cash  sales,  $32.65. 

17.  Paid  cash  for  canned  goods,  $13.75;   meat,  $15.00;   bread,  $5.50. 
Received  for  cash  sales,  $29.90. 

18.  Received  cash,  $2.50,  for  canned  goods  returned  by  us  as  per  agreement. 
Received  for  cash  sales,  $31.55. 

19.  Paid  cash  for  meat,  $9.75;  bread,  $3.40. 
Received  for  cash  sales,  $27.90. 

20.  Paid  cash  for  vegetables,  $13.50;   bread,  $5.60;   butter,  $7.55. 
Received  for  cash  sales,  $44.59. 

Complete  in  the  same  manner  as  instructed  at  the  conclusion  of  Exercises 
Nos.    I    and   2. 

§  21.  A  Book  of  Original  Entry  is  one  ruled  to  contain  a  record  of  business 
transactions  arranged  chronologically,  that  is,  in  the  order  of  their  occurrence. 
The  information  given  in  connection  with  the  record  of  each  transaction  in  a  book 
of  original  entry  should  be  arranged  so  that  the  value  received  and  the  value  parted 
with  may  be  transferred  to  the  accounts  in  the  ledger.  The  method  of  recording 
transactions  in  book  of  original  entr>^  is  illustrated  and  explained  in  this  and  suc- 
ceeding chapters. 

The  purpose  of  a  book  of  original  entry  is  to  provide  a  basis  for  the  information  recorded  in 
the  ledger.  When  transactions  are  recorded  direct  in  the  ledger  it  is  difficult  to  detect  errors  because 
there  is  no  complete  record  of  each  transaction  in  one  place.  Should  the  bookkeeper  fail  to  record 
a  debit  or  a  credit  he  might  have  difficulty  in  locating  the  error. 

§  22.  The  Journal  is  a  book  of  original  entry.  The  ruling  is  shown  in  Illus- 
tration No.  6  and  the  method  of  recording  transactions  on  this  ruling,  in  Illustra- 
tion No.  7.  A  comparison  of  these  two  illustrations  shows  that  space  is  provided 
for  the  name  of  the  account  debited  and  the  amount  (value  received),  the  name 


THE  JOURNAL. 


15 


Illustration  No.  6,  Ruling  for  a  Page  in  the  Journal. 

EXPLANATION.  The  purpose  of  the  ruling  in  this  journal  can  be  understood  better  by 
comparing  it  with  that  in  Illustration  No.  7,  which  contains  the  same  form  of  ruling  with  trans- 
actions recorded.  The  student  will  observe  that  debits  and  credits  are  indicated  by  the  position 
of  the  writing  and  figures. 

of  the  account  credited  and  the  amount  (value  parted  with),  and  the  explanation 
of  the  transaction;  this  explanation  should  be  so  worded  that  one  who  is  familiar 
with  accounting  may  know  that  the  values  received  and  the  values  parted  wuh 
have  been  correctly  expressed  in  the  record. 

^  I.  Journalizing  is  the  analysis  of  transactions  to  determine  which  accounts 
shall  be  debited  and  which  credited;  and  the  recording  of  the  names  of  the  accounts 
debited  and  credited  with  the  amounts  in  a  book  of  original  entry. 

§  23.  Posting  from  the  Journal  is  transferring  the  amounts  from  the 
journal  to  the  accounts  in  the  ledger.  Each  amount  in  the  first  money  column  is 
posted  to  the  debit  side  of  the  account  written  on  the  same  line  with  it,  and  each 
amount  in  the  second  money  column  is  posted  to  the  credit  side  of  the  account 
written  on  the  same  line  with  it.  The  posting  is  indicated  by  writing  the  letter 
"J"  and  the  page  of  the  journal  in  the  folio  column  in  the  ledger,  and  the  page  of 
the  account  in  the  ledger  in  the  folio  column  in  the  journal.  The  amounts  recorded 
in  the  journal  are  posted  to  the  ledger  in  the  same  order  as  they  appear  in  the 
journal;  the  purpose  of  posting  is  to  provide  in  the  ledger,  through  accounts,  a 
complete  history  of  all  the  transactions  with  each  asset,  liability,  cost  and  income. 

The  transactions  recorded  in  Illustration  No.  7,  when  posted  to  the  ledger  accounts,  will 
appear  as  in  Illustration  No.  8,  and  a  Trial  Balance  from  these  ledger  accounts  will  appear  as  in 
Illustration  No.  4  or  No.  5. 


RECORDING  TRANSACTIONS  IN  THE  JOURNAL 

§  24.  Transactions  Are  Recorded  in  the  Journal  in  the  order  in  which 
they  occur.  A  complete  record  of  a  transaction  in  the  journal  shows  the  date 
of  the  transaction,  the  name  of  the  account  debited  and  the  amount,  the  name  of 


i6 


RECORDING  TRANSACTIONS  IN  THE  JOURNAL. 


the  account  credited  and  the  amount,  and  the  explanation.  This  explanation  is 
for  the  information  of  the  bookkeeper  or  any  person  who  may  have  occasion  to 
examine  the  record.  The  record  should  show  a  distinction  between  debits  and 
credits  to  facilitate  posting. 

The  following  transactions  affecting  the  purchases  and  sales  of  merchandise 
for  cash,  performed  by  the  soda  fountain  department  of  the  Central  Drug  Co.  during 


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Illustration  No.  7,  A  Journal  Page  with  Transactions  Recorded  on  It. 

EXPLANATION.     The  transactions  shown  recorded  here  are  outlined  on  pages  17  and  18. 
The  ledger  accounts  resulting  from  posting  are  shown  in  Illustration  No.  8. 


POSTING  FROM  THE  JOURNAL. 


17 


the  week  beginning  July  2,  are  shown  recorded  in  the  journal  in  Illustration 
No.  7  and  posted  to  the  ledger  in  Illustration  No.  8.  These  transactions  are  the 
same  as  those  beginning  on  page  11. 

July  2.     Cash  sales  for  the  day  per  cash  register,  $39.40. 

Recorded  in  the  first  entry  in  Illustration  No.  7.    The  i)osition  of  the  writing  and  figures 
shows   that    Cash   is   debited   and    Sales   credited. 

3.     Bought  syrups  and  extracts,  $5.00;  Coca-Cola,  $12.75;  ice  cream,  $19.20. 

Recorded  in  the  second  entry  in  Illustration  No.  7.     The  position  of  the  writing  and 
figures  shows  that   Purchases  is  debited  and   Cash  credited. 

Cash  sales  for  the  day  per  cash  register,  $50.30. 

Recorded  in  the  third  entry  in  Illustration  No.  7.    The  position  of  the  writing  and  figures 
shows   that   Cash   is   debited   and   Sales   credited. 

5.     Returned  one  gallon  of  ice  cream  purchased  on  the  3d,  and  received  $2.50, 
the  cost  price,  for  the  same. 
Recorded  in  the  fourth  entry  in  Illustration  No.  7.     §  15,  1[  i  is  debited  and  §  17,  If  2 


credited. 


{Concluded  on  page  18.) 


Illustration  No.  8,  A  Ledger  with  Three  Accounts  Resulting  from  Posting. 

EXPLANATION.  The  accounts  in  this  ledger  are  the  result  of  posting  the  transactions 
recorded  in  the  journal,  Illustration  No.  7.  A  comparison  of  the  two  illustrations  shows  that  each 
amount  entered  in  the  first  column  of  the  journal  is  posted  to  the  debit  side  of  the  account  written 
on  the  same  line  with  it,  and  each  amount  entered  in  the  second  column  of  the  journal  is  posted  to 
the  credit  side  of  the  account  written  on  the  same  line  with  it.  The  posting  is  indicated  by  writing 
the  journal  page  (i)  in  the  ledger,  and  the  ledger  page  (i)  in  the  journal. 


i8  RECORDING  TRANSACTIONS  IN  THE  JOURNAL. 

{Continued  from  page  ly.) 

July  5.     Bought  sandwiches,  $12.50;    flavoring,  $16.40;    ice  cream,  $20.00. 

Recorded  in  the  fifth  entry  in  illustration  No.  7.     §  17,  H  i  is  debited  and  §  15,  ^2 
credited. 

6.  Cash  sales  for  the  day  per  cash  register,  $21.50. 

Recorded  in  the  sixth  entry  in  Illustration  No.  7.     §  15,   *i  i   is  debited  and  §  18,  *\  2 
credited. 

7.  Gave  James  Smith  $1.50  for  one-half  gallon  of  ice  cream  which  he  re- 

turned because  it  was  received  in  bad  condition. 

Recorded  in  the  seventh  entry  in  Illustration  No.  7.     §  18,  T  i  is  debited  and  §  15,  ^  2 
credited. 
Cash  sales  for  the  day  per  cash  register,  $62.50. 

Recorded  in  the  eighth  entry  in  Illustration  No.  7.     §  15,  ^  i  Is  debited  and  §  iS,  ^  2 
credited. 

Exercise  No.  4,  Recording  Transactions  in  the  Journal  and  Posting. 

Record  on  journal  paper*  (paper  with  the  same  ruling  as  Illustration  No.  6) 
the  following  transactions  performed  during  the  month  of  March  by  Robert  Smith, 
a  dealer  in  used  automobiles: 

March     i.     Sold  A.  L.  Lott  a  used  Chandler  for  $840.00  cash. 

3.     Bought  a  used  Ford  from  W.  H.  Roland  for  $250.00  cash. 
8.     Sold  W.  W.  Jones  a  used  1920  Franklin  for  $925.00  cash. 
15.     Bought  a  used  Packard  from  Robert  MacFarland  for  $980.00  cash. 
19.     Sold  Davis  Bros,  the  used  Packard  purchased  on  the  15th,  for  $1,200.00 

cash. 
25.     Bought  a  used  Hudson  from  David  Browning  at  Danville  for  $950.00 

cash;    paid  Charlie  Smith  $25.00  for  delivering  this  car. 
31.     Sold   B.    M.   Morris   the   used   Hudson   purchased   on   the   25th,    for 
$1,250.00  cash. 

When  the  above  transactions  have  been  recorded  in  the  journal  as  instructed, 
open  accounts  on  a  sheet  of  ledger  paper  with  Cash  (8),  Purchases  (7),  and  Sales 
(8),  allowing  for  each  account  the  number  of  lines  indicated  by  the  number  given 
in  parenthesis  after  the  name  of  the  account;  post  the  transactions,  and  prove  the 
posting  by  a  Trial  Balance  of  balances. 

Exercise  No.  5,  Recording  Transactions  in  the  Journal  and  Posting. 

Record  on  journal  paper*  the  following  cash  transactions  performed  by  the 
H.  F.  Ritter  Electric  Co.  during  the  month  of  August: 

Aug.     I.     Sold  M.  N.  Stewart  a  No.  9  electric  washer,  $135.50. 
2.     Sold  A.  L.  Graham  three  Solvay  electric  fans,  $99.75. 
5.     Bought  three  electric  lamps  from  the  General  Electric  Co.,  $85.70. 
9.     Received  $275.00  from  the  Dowell  Construction  Co.  in  payment  for 

one  No.  10  electric  washer. 
12.     Bought  two  electric  washers  from  the  General  Electric  Co.,  $325.00. 
16.     Sold  Mrs.  J.  M.  Taylor  one  electric  iron,  $13.50. 
18.     Sold  Mrs.  A.  L.  Day  one  electric  lamp,  $42.50. 

21.     Gave  H.  L.  Jones  $5.50  for  an  electric  iron  which  he  purchased  for  cash 
and  returned  per  agreement. 

{Concluded  on  page  IQ.) 
*See  note  at  bottom  of  page  13. 


QUESTIONS  ON  RECORDING  TRANSACTIONS.  19 

{Continued  from  page  18.) 
Aug.  25.     Sold  Dr.  C.  C.  Doyle  one  No.  5  electric  pad,  $22.50;   one  No.  6  Violet 
Ray  machine,  $35.00. 
26.     Sold  E.  E.  Erblang  one  No.  10  electric  flashlight,  $2.50 ;  one  extra  battery 

for   the   same,    50c. 
28.     Received  $12.50  from  the  General  Electric  Co.  for  a  lamp  which  we 
purchased  from  them  on  the  5th,  but  returned  because  it  was  not  the 
kind  ordered. 
31.     Gave  E.   E.   Erblang  $3.00    for    the    flashlight   and    battery   sold    him 
on   the   26th  and   returned   per  agreement. 
When  the  above  transactions  have  been  recorded  in  the  journal  as  instructed, 
open  accounts  on  a  sheet  of  ledger  paper  with  Cash  (12),  Purchases  (6),  and  Sales 
(11),  allowing  for  each  account  the  number  of  lines  indicated;    post  the  transac- 
tions, and  prove  the  posting  by  a  Trial  Balance  of  totals. 

Exercise  No.  6,  Recording  Transactions  in  the  Journal  and  Posting. 

Record   on  journal   paper   the  following  transactions  performed    during    the 
month  of  March  by  Martin  R.  Daley,  a  retail  furniture  dealer: 
March     i.     Sold  for  cash  one  bedroom  suite,  $175.00;    one  dining  room  suite, 
$196.50. 
5.     Paid  cash  for  furniture  purchased,  $209.60. 
10.     Paid  $18.75  cash,  freight  on  furniture  purchased. 
12.     Received  cash  for  six  rugs  sold,  $205.75. 

Paid  cash  for  furniture  purchased,  $172.60. 
15.     Gave  a  customer  cash,  $5.50,  for  a  chair  returned  as  per  agreement. 
18.     Paid  cash  for  furniture  purchased,  $82.50. 
21.     Received  $14.75  cash  for  three  small  rugs  returned  by  us  to  the  seller 

as  per  agreement. 
25.     Sold  for  cash  one  refrigerator,  $55.00;    one  gas  range,  $47.50;    one 

kitchen  cabinet,  $65.00. 
30.     Paid    the   American    Railway   Express   Co.    cash,    $2.50,    for   express 
charges  on  furniture  purchased. 

When  the  above  transactions  have  been  recorded  in  the  journal  as  instructed, 
open  accounts  on  a  sheet  of  ledger  paper  with  Cash  (10),  Purchases  (9),  and  Sales 
(7),  allowing  for  each  account  the  number  of  lines  indicated;  post  the  transactions 
and  prove  the  posting  by  a  Trial  Balance  of  balances. 

QUESTIONS 

1.  What  is  the  purpose  of  an  account? 

2.  In  what  order  are  the  transactions  recorded? 

3.  State  the  two  methods  of  recording  transactions. 

4.  How  is  a  cash  sale  recorded  (a)  in  the  journal  and  (b)  direct  in  the  ledger? 

5.  Which  is  preferable,  a  bound  book  or  a  loose-leaf  book? 

6.  If  a  merchant  wishes  to  know  the  total  sales  of  merchandise  for  any  given 

number  of   months,    from   which   book   of   account   would    he   obtain    the 
information?   from  what  account? 

7.  If  a  drug  store  has  five  departments,  would  it  be  necessary  to  maintain  a  Cash 

account  for  each  department?    Give  reasons  for  your  answer. 

8.  Would  it  be  necessary  to  keep  a  separate  record  of  the  sales  made  by  each  of 

the  five  departments  mentioned  in  Question  No.  7? 


20  QUESTIONS  ON  RECORDING  TRANSACTIONS. 

9.  If  you  were  keeping  books  for  a  local  merchant  and,  when  you  proved  cash  at 
the  close  of  January  10,  you  found  that  you  had  $2.00  more  cash  than  the 
amount  shown  by  the  Cash  account,  what  entry  would  you  make  for  the 
$2.00? 

10.  Why  will  the  Sales  account  always  show  a  cre^iit  balance? 

11.  Why  will  the  Purchases  account  always  show  a  debit  balance? 

12.  Why  will  the  Cash  account  always  show  a  debit  balance? 

13.  Why  does  the  Trial  Balance  prove  that  the  total  debits  equal  the  total  credits 

in  the  ledger? 

14.  If    $10.00  cash  is  received  for  a  sale  of  merchandise  and  the  amount  is  erro- 

neously entered  on  the  credit  side  of  the  Purchases  account  instead  of  the 
Sales  account,  how  would  it  affect  the  Trial  Balance? 

15.  How  would  the  error  mentioned  in  Question  14  affect  the  balance  of  the  Pur- 

chases account?   the  Sales  account? 

16.  If  the  debits  and  credits  on  the  Trial  Balance  are  not  equal,  how  does  the  book- 

keeper who  has  recorded  the  transactions  separate  from  the  ledger  ascertain 
the  error? 

17.  Why  is  it  advisable  to  give  an  explanation  of  each  entry  in  the  journal? 

18.  If  $10.10  cash  is  received  for  merchandise  sold  and  recorded  in  the  journal  as 

Cash,  Dr.,  $10.00,  and  Sales,  Cr.,  $10.10,  what  effect  will  this  have  on  the 
Trial  Balance  if  the  entry  is  posted  as  recorded? 

19.  What  does  a  telephone  company  sell? 

20.  Would  these  sales  be  recorded  in  a  Sales  account? 

21.  Would  the  bookkeeper  for  a  city  government  have  a  Sales  account  in  his 

ledger? 

22.  Would  the  farmer  who  keeps  a  record  of  the  transactions  he  performs  have  a 

Sales  account  in  his  ledger? 

23.  If  a  merchant  discontinues  business  and  sells  all  the  merchandise  which  he 

owns,  what  will  the  balance  of  the  Sales  account  show? 

24.  Under  the  conditions  mentioned  in  Question  No.  23,  what  would  the  balance 

of  the  Purchases  account  show? 

25.  If  a  grocer  buys  an  automobile  truck  to  be  used  in  delivering  merchandise, 

would  the  value  of  this  truck  be  debited  to  the  Purchases  account?     Give 
reasons  for  your  answer. 


Chapter  III 

RECORDING  TRANSACTIONS— Continued 

§  25.  Purchases  and  Sales  of  Merchandise  on  Account.  When  the 
owner  of  a  business  purchases  merchandise  with  the  agreement  that  it  is  to  be 
paid  for  at  a  later  date,  he  incurs  an  obHgation  or  a  liabiHty.  The  transaction 
will  be  recorded  in  the  same  manner  as  if  he  had  paid  cash  except  the  name  of  the 
person  or  business  from  whom  the  merchandise  is  pui  chased  will  be  credited  in 
place  of  cash;  when  the  obligation  is  paid  as  per  agreement,  the  account  with  the 
person  or  business  will  be  debited  and  Cash  credited.  The  value  received  in  the 
first  transaction  is  the  merchandise  purchased,  and  the  value  parted  with,  the 
promise  to  pay  the  liability  incurred.  The  value  received  in  the  second  transaction 
is  the  cancellation  of  the  obligation,  and  the  value  parted  with,  the  cash. 

When  the  owner  of  a  business  sells  his  merchandise  with  the  agreement  that 
it  is  to  be  paid  for  at  a  later  date,  he  extends  credit  to  the  one  who  purchases  the 
merchandise.  A  transaction  of  this  nature  will  be  recorded  in  the  same  manner 
as  when  cash  is  received,  except  that  the  name  of  the  person  who  purchases  the 
merchandise  will  be  debited  instead  of  Cash;  when  the  owner  of  the  business  re- 
ceives cash  from  the  one  to  whom  he  has  extended  credit,  he  debits  Cash  and  credits 
the  account  with  the  person.  The  value  received  in  the  first  transaction  is  the 
promise  of  the  person  to  whom  the  merchandise  is  sold,  and  the  value  parted  with, 
the  merchandise;  the  value  received  in  the  second  transaction  is  cash,  and  the 
value  parted  with,  the  cancellation  of  the  obligation  of  the  one  to  whom  the  mer- 
chandise was  sold. 

Purchases  and  sales  of  merchandise  where  cash  is  not  involved  are  referred  to  as  "on  account," 
possibly  because  the  account  with  the  person  takes  the  place  of  cash  until  the  amount  is  paid.  The 
owner  of  the  business  regards  those  who  extend  credit  to  him  as  his  creditors,  and  those  to  whom 
he  extends  credit  as  his  customers;  the  term  "customer"  also  applies  to  those  from  whom  cash  is 
received  at  the  time  the  sale  is  made. 

ACCOUNTS  WITH  PERSONS 

§  26.  Accounts  with  Persons  are  those  required  when  credit  is  extended 
to  the  business  through  the  purchase  of  merchandise,  or  when  the  business  extends 
credit  to  its  customers  through  the  sale  of  merchandise.  Accounts  with  persons 
are  divided  into  two  classes:  one  (accounts  with  customers)  shows  the  result  of 
transactions  with  the  persons  to  whom  the  business  sells  merchandise  or  other 
assets  on  account,  usually  referred  to  as  "accounts  receivable";  and  the  other 
(accounts  with  creditors)  shows  the  result  of  transactions  with  those  from  whom 
merchandise  is  purchased  on  account,  usually  referred  to  as  "accounts  payable." 

ACCOUNTS  RECEIVABLE 

§  27.  The  Purpose  of  an  Account  with  a  Customer  is  to  show  the  balance 
due  from  the  customer  as  a  result  of  the  transactions  in  which  the  business  sells 
merchandise  to  him  on  account.  When  a  customer  pays  cash  for  merchandise, 
it  is  not  necessary  to  record  the  transactions  in  an  account  with  him;  but  when 
he  buys  and  does  not  pay  cash,  it  is  necessary  to  record  the  date  and  amount  of 
the  sale  in  an  account  with  him  so  that  the  owner  inay  know  the  amount  'the  cus- 

21 


22  ACCOUNTS  RECEIVABLE  AND  PAYABLE. 

tomer  owes  him  when  settlement  is  desired.  A  separate  account  is  kept  with  each 
customer  because  the  owner  of  the  business  should  know  the  amount  due  from 
each  customer  to  whom  he  sells  on  account  as  well  as  the  total  amount  due  from 
all  customers.  The  address  of  each  customer  should  be  given  in  connection  with 
the  title  of  his  account;    this  includes  street,  number,  city,  and  state. 

Debit  the  Account   of  Each    Customer:  Credit  the  Account  of  Each    Customer: 

^  I.     For  the  selling  price  of  merchan-  ^  2.     For  the  cash  or  other  assets  re- 

dise  sold  to  him  on  account,  ceived  from  him  to  apply  on  ac- 

and    for    prepaid    transporta-  count,  and  for  the  amount  of 

tion   charges   if   the   terms  of  .  any    allowance    or   deduction 

sale  do   not   include  delivery.  granted  to    him.     Partial  pay- 

ments   are    indicated    as    ex- 
plained in  ^  5. 

^  3.  The  Balance  of  an  Account  Receivable  shows  the  amount  the  customer 
owes  the  business.  It  is  one  of  the  assets  of  the  business.  The  debit  side  will  be 
the  larger  unless  the  customer  should  pay  for  more  than  he  has  purchased.  When 
the  two  sides  are  equal,  his  account  is  said  to  be  in  balance;  this  indicates  that  he 
has  paid  for  all  the  merchandise  sold  him  on  account. 

^  4.  Ruling  an  Account  Receivable.  When  the  account  with  a  customer  is 
in  balance,  it  should  be  ruled  with  a  single  red  line  on  each  side,  across  the  money 
columns  only,  as  in  the  account  with  Walter  Rogers  in  Illustration  No.  9;  the 
lines  should  be  drawn  on  the  same  blue  line  on  each  side  when  possible.  If  there 
are  a  number  of  debits  or  credits,  the  two  sides  should  be  footed  with  small  pencil 
figures  to  prove  that  they  are  equal  before  ruling  as  in  the  account  with  People's 
Hotel  on  page  71.  The  use  of  red  ink  for  ruling  is  not  arbitrary  but  it  is  customary 
for  bookkeepers  to  use  it,  hence  its  use  in  the  illustrations. 

^  5.  Partial  Payments.  A  debtor  has  the  right,  by  law,  to  indicate  on  what 
item  his  payment  shall  be  applied.  Thus  if  he  owes  several  amounts  and  wishes 
the  payment  to  be  applied  to  any  one  particular  amount,  and  indicates  this,  the 
credit  must  be  applied  on  that  amount.  In  cases  of  this  kind  the  bookkeeper 
should  indicate  the  amount  on  which  the  credit  is  applied  by  placing  a  letter  at 
the  left  of  the  amount  of  the  item  on  the  debit  side,  and  placing  the  same  letter  to 
the  left  of  the  amount  of  each  payment  on  the  credit  side.  It  is  best  to  begin  with 
"a"  and  continue  with  as  many  letters  as  may  be  required  for  payments  on  different 
debits.  The  letters  are  not  necessary  when  an  item  is  paid  in  full  by  one  payment, 
and  the  account  is  ruled.  If  the  payments  are  indicated  by  letter  as  explained, 
the  bookkeeper  can  ascertain  the  amount  due  for  any  one  sale  without  referring 
to  a  book  of  original  entry.  The  use  of  the  letters  as  explained  here  is  illustrated 
in  the  personal  accounts  on  pages  70,  71  and  72. 

Those  to  whom  the  business  sells  merchandise  on  account  are  referred  to  as  "trade  customers" 
and  those  from  whom  it  buys  merchandise  on  account  as  "trade  creditors."  Property  other  than 
merchandise  may  be  bought  or  sold  on  account;  such  sales  and  purchases  are  recorded  in  personal 
accounts  in  the  same  manner  as  sales  and  purchases  of  merchandise. 


ACCOUNTS  PAYABLE 

§  28.  The  Purpose  of  an  Account  with  a  Creditor  is  to  show  the  balance 
due  from  the  creditor  as  a  result  of  the  transactions  in  which  the  business  buys 
merchandise  from  him  on  account.  When  merchandise  is  purchased  for  cash,  no 
account-  with  the  one  from  whom  it  is  purchased  is  necessary  because  the  transac- 
tion is  completed;  but  when  the  business  buys  on  account,  it  is  necessary  to  keep 
a  record  of  such  transactions  in  order  that  the  owner  mav  know  the  amount  he 


RECORDING  TRANSACTIONS  IN  THE  LEDGER.  23 

owes  at  the  time  settlement  is  made.  A  separate  account  is  kept  with  each 
creditor  because  the  owner  of  the  business  should  know  the  amount  he  owes 
each  creditor  as  well  as  the  total  amount  due  all  creditors. 

Debit  the  Account  of  Each  Creditor:  Credit  the  Account  of  Each  Creditor: 
^  I.  For  cash  or  other  assets  of  the  ^  2.  For  the  cost  of  merchandise 
business  given  him  to  apply  purchased  from  him  on  ae- 
on account,  and  for  any  al-  count,  and  for  prepaid  trans- 
lowance  or  deduction  granted  portation  charges  if  the  terms 
to  the  business  by  him.  Partial  of  purchase  do  not  include 
payments  are  indicated  as  delivery, 
explained  in  §  27,  T[  5. 

^  3.  The  Balance  of  an  Account  Payable  shows  the  amount  the  business 
owes  the  creditor.  The  credit  side  will  be  the  larger  unless  the  business  should  pay 
a  creditor  more  than  it  owes  him.  The  balance  due  a  creditor  is  one  of  the  verbal 
obligations  of  the  business,  hence  a  liability. 

^  4.  Riding  an  Account  Payable.  The  account  with  a  creditor  is  ruled  in 
the  same  manner  as  an  account  with  a  customer,  as  described  in  §  27,  ^  4. 

^  5.  Partial  Payments  should  be  indicated  by  letter  as  explained  in  §  2"], 
^  5.  This  enables  the  bookkeeper  to  ascertain  the  balance  due  on  any  one  purchase 
without  referring  to  a  book  of  original  entry. 


RECORDING  TRANSACTIONS  DIRECT  IN  THE  LEDGER 

§  29.  Transactions  with  customers  and  creditors  on  account  may  be 
recorded  direct  in  the  ledger  in  the  same  manner  as  cash  transactions.  When 
credit  is  extended  to  a  customer  of  the  business,  his  promise  to  pay  the  amount  of 
the  sale  is  recorded  on  the  debit  side  of  his  account  as  the  value  received,  and  the 
value  of  the  merchandise  sold,  on  the  credit  side  of  the  Sales  account  in  the  same 
manner  as  a  cash  sale.  When  credit  is  extended  to  the  business,  the  cost  of  the 
merchandise  purchased  is  recorded  on  the  debit  side  of  the  Purchases  account  in 
the  same  manner  as  a  cash  purchase,  and  the  same  amount  is  recorded  on  the  credit 
side  of  the  creditor's  account  because  the  promise  of  the  owner  of  the  business  to 
pay  for  the  merchandise  bought  is  regarded  as  the  value  parted  with.  The  account 
with  a  customer  remains  on  the  ledger  as  an  asset,  and  that  with  a  creditor  as  a 
liability,  until  settlement  is  made,  either  with  cash  or  some  other  asset. 

The  following  transactions  affecting  the  purchases  and  sales  of  merchandise 
for  cash  and  on  account,  performed  by  J.  H.  Henderson,  a  retail  furniture  dealer, 
during  the  month  of  November,  are  shown  recorded  direct  in  accounts  with  Cash, 
customers,  creditors.  Purchases,  and  Sales  in  Illustration  No.  9  and  a  Trial  Balance 
of  totals  made  from  the  accounts,  in  Illustration  No.  10. 

Nov.     I.     Purchased    furniture    from    the    Consolidated    Furniture    Co.,    Grand 
Rapids,  on  sixty  days'  time,  $215.75. 
2.     Sold  C.  H.  Powers,  Arlington,  on  account,  one  bedroom  suite,  $125.00. 
6.     Sold  Walter  Rogers,  City,  on  account,  one  hatrack,  $22.50. 
12.     Received  cash  for  furniture  sold  today,  $625.50. 
14.     Paid  the  Consolidated  Furniture  Co.  $100.00  on  account. 
20.     Received  $22.50  from  Walter  Rogers  in  payment  for  the  hatrack  sold 
him  on  the  6th. 

25.  Received  $25.00  from  C.  H.  Powers  to  apply  on  account. 

26.  Sold  C.  H.  Powers  on  account  three  leather  rockers  at  $25.50  each. 
29.     C.  H.  Powers  returned  one  rocker  and  was  allowed  credit  for  $25.50. 


24 


RECORDING  TRANSACTIONS  IN  THE  LEDGER 


Illustration  No.  9,  A  Ledger  with  Six  Accounts. 

EXPLANATION.  This  illustration  is  in  the  same  form  as  Illustration  No.  3,  with  the 
exception  of  three  additional  accounts,  two  with  customers  and  one  with  a  creditor.  A  comparison 
of  the  transactions  wdth  the  record  will  show  that  the  value  received  in  each  is  recorded  on  the  debit 
side,  and  the  value  parted  with  on  the  credit  side.  The  "60  days"  in  the  explanation  column  of 
the  account  with  the  Consolidated  Furniture  Co.  refers  to  the  time  when  payment  is  to  be  made. 
Since  the  purchase  is  on  November  i,  payment  will  be  expected  on  December  31.  When  no  specific 
time  of  settlement  is  mentioned,  the  purchase  or  sale  is  sometimes  referred  to  as  "on  account," 
and  settlement  is  usually  required  on  the  first  of  the  month  following  the  purchase  or  sale. 


RECORDING  TRANSACTIONS  IN  THE  LEDGER. 


25 


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Illustration  No.  10,  A  Trial  Balance  of  Totals. 

EXPLANATION.  This  Trial  Balance,  which  is  prepared  from  the  ledger  in  Illustration  No. 
9,  is  the  same  form  as  Illustration  No.  4  with  the  addition  of  two  personal  accounts.  By  com- 
paring this  illustration  with  Illustration  No.  9,  it  will  be  observed  that  the  account  with  Walter 
Rogers  does  not  appear  on  the  Trial  Balance.  The  reason  for  this  is  that  the  amounts  recorded 
on  the  debit  and  credit  sides  are  equal.  This  explains  the  statement  in  §  20  that  only  the  open 
accounts   in   the   ledger   appear   on   the   Trial    Balance. 

Exercise  No.  7,  Recording  Transactions  Direct  in  the  Ledger. 

Record  on  ledger  paper*  the  following  transactions  performed  during  the  month 
of  October  by  J.  J.  Hammond,  a  retail  shoe  dealer.  Allow  space  for  the  accounts  as 
follows:  Cash,  ten  lines;  Purchases,  ten  lines;  Sales,  ten  lines;  J.  C.  Mason, 
Walter  Love,  J.  C.  Miller,  Robert  Whitacre,  W.  O.  Crosswhite,  Davis  Bros.,  and 
Smith  Shoe  Co.,  each  four  lines.     Give  each  customer  and  creditor  a  local  address. 

Oct.     2.  Bought  shoes  from  W.  O.  Crosswhite  on  account,  $187.65. 

3.  Sold  J.  C.  Mason  on  account  one  pair  of  shoes,  $11.50. 

5.  Bought  shoes  from  Davis  Bros,  on  account  $281.36. 

7.  Received  for  cash  sales  of  shoes,  $127.50. 

9.  Paid  W.  O.  Crosswhite  $100.00  on  account. 

10.  Sold  Walter  Love  on  account  six  pairs  of  shoes,  $56.50. 

1 1 .  Bought  shoes  from  the  Smith  Shoe  Company  on  sixty  days'  time,  $211 .85. 

12.  Received  for  cash  sales  of  shoes,  $97.50. 

13.  Paid  W.  O.  Crosswhite  $87.65  in  full  of  account. 

14.  Sold  J.  C.  Miller  on  account  two  pairs  of  shoes,  $25.25. 

16.  Received  for  cash  sales  of  shoes,  $106.95. 

17.  Allowed  Walter  Love  credit  for  one  pair  of  shoes  returned,  $17.50. 

18.  Bought  shoes  from  W.  O.  Crosswhite  on  account,  $321.85. 

19.  Paid  $82.50  for  shoes  purchased  and  delivered  today. 

20.  Paid  Mrs.  W.  C.  Davis  $6.00  for  a  pair  of  shoes  returned  for  which  she 

had  paid  cash  when  sold  to  her. 
23.     Received  $39.00  from  Walter  Love  in  full  of  account. 

25.  Paid  the  Smith  Shoe  Company  $25.00  on  account. 

26.  Received  for  cash  sales  of  shoes,  $88.90. 

27.  Paid  the  Santa  Fe  Railroad  $65.50  for  freight  on  shoes  purchased. 

28.  Sold  Robert  Whitacre  one  pair  of  shoes  on  account,  $15.00. 

30.  Bought  shoes  from  the  Smith  Shoe  Company  on  sixty  days'  time,  $175.75  • 

31,  Davis  Bros,  allowed  us  credit  for  $62.50  for  shoes  returned  to  them. 

When  these  transactions  have  been  recorded  in  the  accounts,  prove  the  equality 
of  the  debits  and  credits  by  a  Trial  Balance  of  totals. 


*See  note  at  the  bottom  of  page  13. 


26  RECORDING  TRANSACTIONS  IN  THE  JOURNAL. 

Exercise  No.  8,  Recording  Transactions  Direct  in  the  Ledger. 

Record  on  ledger  paper  the  following  transactions  performed  by  F.  B.  Bellis, 
a  retail  candy  merchant,  during  the  week  beginning  July  5.  Allow  space  for  the 
accounts  as  follows:  Cash,  ten  lines;  Purchases,  ten  lines;  Sales,  ten  lines; 
Candy  Kitchen,  seven  lines;  Robert  Farland,  five  lines;  Norway  Candy  Co.,  six 
lines;  R.  H.  Hunter,  five  lines.  Give  each  person  a  local  street  address. 
July  5.  Purchased  from  the  Candy  Kitchen,  City,  on  account,  $65.84. 
Cash  sales  for  the  day,  $62.48. 

6.  Paid  cash  for  nuts  purchased,  $9.50. 
Cash  sales  for  the  day,  $55.80. 

7.  Sold  Robert  Farland,  City,  on-  account,  six  boxes  of  candy  at*  $2.75. 
Purchased  from  the  Norway  Candy  Co.,  City,  on  account,  $32.75. 
Cash  sales  for  the  day,  $41.90. 

8.  Paid  the  Candy  Kitchen  $50.00  on  account. 

Paid  a  customer  $1.00  for  a  box  of  candy  which  he  had  purchased  for 

cash  and  returned  per  agreement. 
Cash  sales  for  the  day,  $41.80. 

9.  Received  $10.00  from  Robert  Farland  on  account. 

Sold  R.  H.  Hunter,  City,  on  account,  twelve  boxes  of  candy  at*  $2.25. 
Purchased  from  the  Candy  Kitchen,  City,  on  account,  $61.50. 
Cash  sales  for  the  day,  $52.80. 
10.     Paid  cash  for  chewing  gum,  $5.00. 

Paid  the  Candy  Kitchen  $25.00  on  account. 

Purchased  from  the  Norway  Candy  Co.,  City,  on  account,  $26.95. 

Returned  to  the  Candy  Kitchen  six  boxes  of  candy  purchased  on  the  9th 

and  received  credit  for  the  same  at  $1.75  per  box,  the  cost  price. 
Cash  sales  for  the  day,  $101.19. 
When  these  transactions  have  been  recorded  in  the  accounts,  prove  the  equality 
of  the  debits  and  credits  by  a  Trial  Balance  of  balances. 

RECORDING  TRANSACTIONS  IN  THE  JOURNAL 

§  30.  Transactions  with  customers  and  with  creditors  may  be  recorded  in 
the  journal  in  the  same  manner  as  cash  transactions.  When  credit  is  extended  to 
a  customer,  his  name  is  written  in  the  journal  as  the  account  debited,  and  the 
Sales  account  credited;  when  credit  is  extended  to  the  business,  the  Purchases 
account  is  debited,  and  the  name  of  the  creditor  is  written  as  the  account  credited. 
The  owner  should  have  a  record  of  the  articles  sold  on  account;  this  information 
may  be  obtained  by  retaining  a  copy  of  the  list  given  the  customer,  or  writing  the 
names  of  the  articles  in  connection  with  the  explanation  in  the  journal.  It  is  not 
necessary  to  itemize  the  articles  purchased  in  the  explanation  of  the  transaction 
in  the  journal  because  the  creditor  provides  a  list  of  these  articles. 

The  following  transactions  affecting  the  purchases  and  sales  of  merchandise 
for  cash  and  on  account,  performed  by  J.  H.  Henderson,  a  retail  furniture  dealer, 
during. the  month  of  November,  are  shown  recorded  in  the  journal  in  Illustration 
No.  II  and  posted  to  the  ledger  in  Illustration  No.  12.  These  transactions  are 
the  same  as  those  on  page  23. 

Nov.     I.     Purchased    furniture    from    the    Consolidated    Furniture    Co.,    Grand 
Rapids,  on  sixty  days'  time,  $215.75. 

2.     Sold  C.  H.  Powers,  Arlington,  on  account,  one  bedroom  suite,  $125.00. 

6.     Sold  Walter  Rogers,  City,  on  account,  one  hatrack,  $22.50. 

{Concluded  on  page  28.) 
*NOTE.     The  word  "at,"  appearing  before  the  price,  indicates  that  this  price  is  per  unit; 
if  this  word  does  not  appear,  the  price  given  appHes  to  the  quantity  mentioned.     "Six  boxes  candy 
at  $2.75"  means  that  the  amount  of  the  sale  is  $16.50.     "Six  boxes  candy,  $2.75,"  means  that  the 
amount  of  the  sale  is  $2.75. 


RECORDING  TRANSACTIONS  IN  THE  JOURNAL. 


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Illustration  No.  ii,  A  Journal  Page  with  Transactions  Recorded  on  It. 
EXPLANATION      The  numbers  in  the  foHo  column  indicate  the  page  of  the  ledeer  to  which 

i'ournaT  bnt'.f  ?hf;-    ^\T  ""'"''"'''  ^'^  "°^  ^^''''^  ^^en  the  transactions  are  recorded  in    he 
journal,  but  at  the  time  the  amounts  are  posted  to  the  ledger  accounts. 


28 


RECORDING  TRANSACTIONS  IN  THE  JOURNAL. 


Nov. 


12. 
14. 
20. 

25- 

26. 
29. 


{Continued  from  page  26.) 
Received  cash  for  furniture  sold  today,  $625.50. 
Paid  the  ConsoHdated  Furniture  Co.  $100.00  on  account. 
Received  $22.50  from  Walter  Rogers  in  payment  for  the  hatrack  sold 

him  on  the  6th. 
Received  $25.00  from  C.  H.  Powers  to  apply  on  account. 
Sold  C.  H.  Powers  on  account  three  leather  rockers  at  $25.50  each. 
C.  H.  Powers  returned  one  rocker  and  was  allowed  credit  for  $25.50. 

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Illustration  No.  12,  A  Ledger  with  Six  Accounts  Resulting  from  Posting. 

EXPLANATION.  The  transactions  in  this  ledger  were  not  recorded  direct  in  it,  but  were 
recorded  in  the  journal  shown  in  Illustration  No.  11  and  posted,  as  indicated  by  the  figures  in 
the  folio  column  of  each  account.  Compare  with  Illustration  No.  Q  and  note  the  additional  infor- 
mation.   A  Trial  Balance  of  totals  taken  from  this  ledger  would  be  the  same  as  Illustration  No.  10 


RECORDING  TRANSACTIONS  IN  THE  JOURNAL. 


29 


Exercise  No.  9,  Recording  Transactions  in  the  Journal  and  Posting. 

Record  on  journal  paper  the  following  transactions  performed  by  the  Central 
Paper  Co.  during  the  month  of  February.  Give  each  customer  and  creditor  a 
local  address. 

Feb.     I.     Purchased  paper  from  the  Whiting  Paper  Co.  on  account,  $350.00. 

2.  Sold  paper  to  the  Federal  Press  on  account,  $126.50. 

3.  Received  $352.10  for  paper  sold  today. 

5.  Purchased  envelopes  from  the  U.  S.  Envelope  Co.  on  account,  $207.60. 

6.  Received  $126.50  from  the  Federal  Press  in  full  of  account. 

7.  Sold  paper  to  C.  J.  Krehbiel  &  Co.  on  account,  $200.25. 
9.  Paid  the  Whiting  Paper  Co.  $150.00  on  account. 

12.  Purchased  paper  from  the  Whitaker  Paper  Co.  on  account,  $409.37. 

14.  Paid  $106.16  for  freight  and  drayage  bills  to  date. 

16.  Sold  paper  to  C.  W.  Ogden  on  account,  $98.66. 

19.  Received  credit  from  the  U.  S.  Envelope  Co.  for  $36.50,  value  of  en- 

velopes returned  by  us  per  agreement. 

20.  Received  for  cash  sales  of  paper  today,  $191.96. 

21.  Received  $200.25  from  C.  J.  Krehbiel  &  Co.  in  full  of  account. 

23.  Sold  paper  and  envelopes  to  the  Federal  Press  on  account,  $161.52. 

24.  Allowed  C.  W.  Ogden  credit  for  paper  returned,  $12.50. 

26.     Paid  the  Herrlinger  Paper  Co.  $76.60  for  paper  delivered  today. 
2y.     Sold  paper  and  envelopes  to  C.  J.  Krehbiel  &  Co.  on  account,  $112.60. 
28.     Paid  the  U.  S.  Envelope  Co.  balance  due  on  account,  $171.10. 
Received  $40.00  from  C.  W.  Ogden  on  account. 

When  the  above  transactions  have  been  recorded  in  the  journal  as  instructed, 
open  accounts  on  a  sheet  of  ledger  paper  with  Cash  (9),  Purchases  (9),  Sales  (11), 
Federal  Press  (5),  C.  J.  Krehbiel  &  Co.  (5),  C.  W.  Ogden  (5),  Whiting  Paper  Co. 
(5),  U.  S.  Envelope  Co.  (5),  Whitaker  Paper  Co.  (5),  allowing  for  each  account  the 
number  of  lines  indicated;  post  the  transactions,  and  prove  the  posting  by  a  Trial 
Balance  of  totals. 


Exercise  No.  10,  Recording  Transactions  in  the  Journal  and  Posting. 

Record   on  journal   paper  the   following   transactions   performed   during   the 
month  of  May  by  J.  O.  Cutshaw,  an  automobile  tire  dealer: 


May 


/ 
10 
12 
13 

14 
16 
20 


Purchased  from  the  Goodyear  Tire  Co.,  City,  on  account,  $355.00. 
Received  cash  for  four  Goodyear  33  x  4  cord  tires,  $215.60. 
Purchased  from  the  Goodrich  Tire  Co.,  City,  on  account,  $525.50. 
Sold  the  Central  Grocery  Co.,  City,  on  account,  two  Ford  tires,  $32.65. 
Received  cash  for  one  35  x  5  Silvertown  cord  tire,  $67.50. 
Paid  the  Goodyear  Tire  Co.  $200.00  on  account. 

Sold  I.  W.  Walker,  City,  on  account,  four  Miller  cord  tires  at  $52.45. 
Gave  I.  W.  Walker  credit  for  one  of  the  tires  sold  him  on  the  12th  and 

returned  by  him  today  per  agreement. 
Received  for  cash  sales  of  tires,  $278.50. 

Received  $32.65  from  the  Central  Grocery  Co.  in  full  of  account. 
Sold  W.  L.  Watson,  City,  on  account,  two  33  x  4  Fisk  cord  tires  at 

$48.00;   these  tires  are  not  carried  in  stock  and  were  purchased  from 

the  Fisk  Tire  Co.,  City,  on  account,  at  $36.00. 
Record  the  sale  and  purchase  as  separate  transactions. 

(Concluded  on  page  jo.) 


30  QUESTIONS  ON  RECORDING  TRANSACTIONS. 

{Exercise  No.  lo — Continued  from  page  2Q.) 

May  25.     Sold  David  Jordan,  City,  on  account,  two  32  x  4  Silvertown  cord  tires 
at  $41.60  each. 

26.  Paid  the  Goodrich  Tire  Co.  $200.00  on  account. 

27.  Received  $50.00  from  W.  L.  Watson  to  apply  on  account. 

28.  Paid  the  Fisk  Tire  Co.  $72.00  in  full  of  account. 

Returned  to  the  Goodrich  Tire  Co.  two  32  x  4  fabric  tires  and  received 
credit  for  $34.60. 
31.     Received  for  cash  sales  of  tires,  $315.50. 

Purchased  from  the  Goodyear  Tire  Co.,  City,  on  account,  $452.40. 

When  the  above  transactions  have  been  recorded  in  the  journal  as  instructed, 
open  accounts  on  a  sheet  of  ledger  paper  with  Cash  (10),  Purchases  (8),  Sales  (12), 
Goodyear  Tire  Co.  (5),  Goodrich  Tire  Co.  (4),  Fisk  Tire  Co.  (4),  Central  Grocery 
Co.  (4),  I.  W.  Walker  {/\),  W.  L.  Watson  (4),  David  Jordan  (4),  allowing  for  each 
account  the  number  of  lines  indicated;  post  the  transactions,  and  prove  the  posting 
bv  a  Trial  Balance  of  balances. 


QUESTIONS 

1.  If  a  merchant  buys  merchandise  on  March  2,   1922,    with    the    privilege    of 

paying  for  the  same  within  sixty  days,  on  what  date  will  he  be  required  to 
pay  the  amount? 

2.  Why  is  it  not  necessary  to  keep  an  account  with  the  person  to  whom  the 

business  sells  for  cash? 

3.  Is  an  amount  due  from  a  customer  one  of  the  assets  of  the  business? 

4.  Would  you  consider  the  asset  of  the  business  described  as  "Accounts  Receiv- 

able" as  valuable  as  the  asset  described  as  "Cash"?    Give  reasons. 

5.  Distinguish  between  the  meaning  of  the  terms  "creditor"  and  "customer." 

6.  Why  is  it  necessary  for  the  bookkeeper  to  indicate  payments  made  to  apply 
on  merchandise  purchased  or  sold  on  a  designated  date? 

Would  it  be  possible  for  an  account  with  a  customer  to  show  a  credit  balance? 

Explain. 
Would  it  be  possible  for  an  account  with  a  creditor  to  show  a  debit  balance? 

Explain. 
Why  is  it  advisable  to  rule  an  account  receivable  or  an  account  payable  when 

the  two  sides  are  equal  ? 

10.  Open  an  account  with  Robert  Jones,  a  customer  of  the  business,  and  record 

the  following  transactions  in  it: 

Jan.   10.     Sold  merchandise  on  account,  $425.00.- 

15.     Received  $100.00  to  apply  on  account. 

20.     Sold  merchandise  on  account,  $72.50. 

31.     Received  $200.00  to  apply  on  sale  of  the  loth. 
Feb.   10.     Received  $72.50  in  full  for  sale  of  Jan.  20. 

11.  Why  is  it  not  necessary  to  show  on  the  Trial  Balance  an  account  which  is  in 

balance? 

12.  What  efifect  would  it  have  on  the  Trial  Balance  if  an  account  which  shows  a 

debit  balance  of  $10.00  was  omitted  because  it  was  ruled  by  mistake? 

13.  What  accounts  are  affected  when  the  business  receives  cash  from  a  customer 

in  part  payment  of  his  account? 

14.  What  accounts  are  affected  when  cash  is  paid  to  a  creditor  to  apply  on  an 

account  owed  him? 


QUESTIONS  ON  RECORDING  TRANSACTIONS.  31 

15.  If  a  sale  made  to  a  customer  on  account  should  not  be  recorded,  would  this 

affect  the  equality  of  the  debits  and  credits  on  the  Trial  Balance? 

16.  Can  you  suggest  a  plan  which  would  avoid  the  possibility  of  failing  to  record 

transactions  in  which  merchandise  is  sold  on  account.'' 

17.  If  a  sale  is  made  to  a  customer  for  cash  and  the  transaction  is  not  recorded, 

how  would  the  bookkeeper  detect  the  error? 

18.  If  cash  is  received  from  a  customer  in  payment  of  his  account,  and  the  trans- 

action is  not  recorded,  how  would  the  bookkeeper  detect  the  error? 

19.  If  merchandise  is  purchased  from  a  creditor  on  account  and  the  transaction 

is  not  recorded,  how  would  the  bookkeeper  detect  the  error? 

20.  If  cash  is  paid  for  merchandise  purchased  and  the  transaction  is  not  recorded, 

how  would  the  bookkeeper  detect  the  error? 

21.  If  a  sale  is  made  to  one  customer  and  by  mistake  debited  to  another  customer, 

will  this  affect  the  equality  of  the  debits  and  credits  on  the  Trial  Balance? 

22.  How  would   the   bookkeeper  detect   the   error   mentioned   in   the   preceding 

question? 

23.  If  a  customer's  account,  which  is  not  in  balance,  is  ruled  by  mistake,  how 

would  the  bookkeeper  discover  the  error? 

24.  Why  is  it  advisable  to  indicate  the  address  of  a  customer  on  his  account  in 

the  ledger? 

25.  If  the  two  sides  of  the  Trial  Balance  are  not  equal,  how  would  the  bookkeeper 

ascertain  the  error? 


Chapter  IV 

RECORDING  TRANSACTIONS— Continued 

§  31.  Expense.  Each  business  has  a  building  or  place  in  which  to  carry  on 
its  operations;  this  building  or  place  of  business  is  provided  with  heat  and  light; 
modern  business  requires  the  use  of  the  telephone,  telegraph,  and  other  means  of 
rapid  communication;  clerks  are  employed  to  assist  with  the  purchasing  and  selling 
of  the  merchandise  or  service  which  the  business  sells;  bookkeepers  and  stenog- 
raphers are  required  in  connection  with  the  office  operations;  the  owner  receives  a 
compensation  for  his  services  in  connection  with  the  operations  of  the  business; 
these  and  many  other  services  must  be  purchased  and  paid  for  by  the  business. 
Such  services  are  usually  referred  to  as  the  "operating  cost"  of  the  business,  also 
as  the  "expenses"  of  the  business. 

The  term  "expenses"  also  includes  any  material  purchased  by  the  business  which  will  be  con- 
sumed by  its  use;  this  class  of  material  includes  books  of  account  for  use  in  the  office,  stationery, 
wrapping  paper,  twine,  nails  for  packing  cases,  etc.  The  cost  of  material  regarded  as  expense  is 
usually  shown  in  an  account  separate  from  the  amounts  paid  for  services;  this  will  be  discussed 
later  in  more  detail. 

A  record  of  the  payments  for  operating  cost  (expenses)  is  made  in  one  or  more 
expense  accounts,  depending  on  the  nature  of  the  expenses  and  the  extent  of  the 
business  operations.  When  cash  is  given  in  payment  for  services  or  property  which 
is  regarded  as  an  expense  item,  the  account  which  is  to  show  a  record  of  this  operating 
cost  is  debited  and  the  Cash  account  credited ;  should  an  asset  other  than  cash  be 
given  in  payment,  the  account  which  shows  the  value  of  the  asset  parted  with  is 
credited  instead  of  the  Cash  account. 

EXPENSE  ACCOUNT 

§  32.  The  Purpose  of  this  Account  is  to  show  the  cost  of  operating  the 
business,  that  is,  its  expenses.  If  all  operating  cost  is  debited  to  one  account,  the 
total  cost  of  the  business  operations  will  be  shown  in  this  account.  The  debit  and 
credit  given  below  refer  to  only  one  Expense  account. 

Debit  the  Expense  Account:  Credit  the  Expense  Account: 

^  I.     For  amounts  paid  for  operating  ^  2.     For  any  adjustments*  which  re- 

cost  as  outlined  in  §  31.  duce    the    operating    cost    as 

shown  by  the   debit    side    of 
this  account. 

\  3.  The  Balance  of  this  Account  shows  the  operating  cost  of  the  business 
for  the  period  covered  by  the  debits  and  credits  to  the  account.  The  total 
expense  is  a  deduction  from  the  profit  made  by  the  operations  of  the  business. 

§  33.  Capital.  It  is  usually  necessary  for  the  owner  of  the  business  to  invest 
cash  or  other  property  at  the  beginning  of  the  business,  because,  if  the  business  is 

*NOTE.  The  term  "adjustment"  used  in  connection  with  the  credits  to  the  Expense  account 
refers  to  those  transactions  which  reduce  the  cost  of  operating  the  business.  If  the  cost  of  stamps 
is  debited  to  the  Expense  account,  and  a  part  of  these  stamps  is  sold.  Cash  or  the  asset  received 
is  debited,  and  Expense  credited  because  the  amount  received  reduces  the  expense  cost. 

32 


CAPITAL  ACCOUNT.  33 

to  supply  a  demand,  it  must  have  on  hand  those  things  which  its  customers  will 
wish  to  purchase.  The  cash  or  other  property  which  the  owner  assigns  to  the  oper- 
ations of  the  business  at  its  beginning  or  at  any  time  subsequent  thereto  is  regarded 
as  an  investment  in  the  business  and  referred  to  as  the  "invested  capital  of  the  busi- 
ness." If  the  operations  of  the  business  are  successful — that  is,  if  the  costs  are  less 
than  the  income — the  interest  of  the  owner  (proprietorship)  will  be  increased  by 
this  profit;  if  the  result  of  operating  the  business  is  a  loss,  the  interest  of  the 
owner  (proprietorship)  will  be  decreased  by  this  loss.  Once  each  year  it  is  neces- 
sary for  the  owner  of  the  business  to  ascertain  the  profit  or  loss  resulting  from  the 
operations  of  the  business  during  the  year  because  of  the  governmental  tax  on 
income.  If  the  bu'siness  has  been  operated  at  a  profit,  the  owner's  capital  is  in- 
creased the  amount  of  this  profit;  if  the  business  has  been  operated  at  a  loss,  the 
owner's  capital  is  decreased  the  amount  of  the  los^;. 

The  owner  may,  if  he  desires,  withdraw  part  of  his  capital;  the  withdrawal  of 
a  part  of  his  capital  will  decrease  his  proprietorship  in  the  business.  Should  the 
owner  take  cash,  merchandise  or  other  assets  from  the  business  as  a  remuneration 
for  his  services  in  connection  with  the  operations  of  the  business,  the  value  of  these 
withdrawals  is  debited  to  Expense  in  the  same  manner  as  amounts  paid  for  the 
salaries  of  clerks  and  other  employees.  If  desired,  the  owner  may  be  debited  for 
the  value  of  the  property  which  he  takes  from  the  business  and  credited  with  the 
salary  he  is  to  receive  as  compensation;  the  title  of  this  account  would  be  the  name 
of  the  owner  with  the  word  "personal"  written  after  it.  The  owner's  personal 
account  is  debited  with  withdrawals  and  credited  with  the  salary;  the  balance,  if  a 
debit,  will  show  the  amount  he  has  withdrawn  in  excess  of  his  salary,  and  if  a 
credit,  the  amount  of  salary  yet  to  be  withdrawn.  Under  no  circumstances  should 
withdrawals  for  services  be  debited  to  the  Capital  account. 

CAPITAL  ACCOUNT 

§  34.  The  Purpose  of  this  Account  is  to  show  the  result  of  transactions 
which  the  business  has  with  the  owner  of  the  business  as  they  relate  to  investments 
and  withdrawals. 

Debit  the  Capital  Account:  Credit  the  Capital  Account: 

^  I.     For  debts  of  the  owner  assumed  ^4.     For    cash    or    other    assets    in- 

at   the  beginning  of  the  busi-  vested  at  the  beginning  of  the 

ness.  business. 

II  2.     For    amounts    withdrawn    from  *\  5.     For  subsequent  investments. 

the    capital    invested.  H  6.     For  the  net  profit  at  the  end  of 

*\  3      For  the  net  loss  at  the  end  of  the  the  business  year. 

business  year. 

^  7.  The  Balance  of  this  Account,  show^s  the  owner's  interest  in  the  busi- 
ness, that  is,  his  proprietorship  or  net  investment. 

RECORDING  TRANSACTIONS  DIRECT  IN  THE  LEDGER 

§  35.  The  Complete  Operations  of  a  business  include  transactions  which 
relate  to  the  investment  at  the  beginning  of  the  business,  the  purchases  and  sales 
of  merchandise,  and  the  payment  of  operating  expenses.  All  of  these  transactions 
may  be  recorded  direct  in  the  ledger  as  explained  in  §§  19  and  29. 

The  following  transactions  relative  to  the  complete  operations  of  a  business 
(including  investment,  operating  cost,  and  purchases  and  sales  of  merchandise  for 

^  (Concluded  on  page  J5.) 


34 


RECORDING  TRANSACTIONS  IN  THE  LEDGER. 


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Illustration  No.  13,  A  Ledger  with  Eight  Accounts. 

EXPLANATION.  This  ledger  contains  a  record  of  the  transactions  outlined  in  §  35,  recorded 
direct  in  the  ledger.  It  is  the  same  as  Illustrations  No.  3  and  No.  9  with  the  addition  o(  accounts 
with  the  owner  and  Expense.  Whether  only  a  part  or  all  of  the  transactions  in  connection  with  the 
operations  of  a  business  are  recorded,  each  transaction  afTects  two  accounts,  one  showing  the  value 
received  recorded  on  the  debit  side  and  the  other  the  value  parted  with  recorded  on  the  credit  side. 
The  same  amount  in  each  transaction  is  recorded  on  the  debit  side  of  one  account  and  on  the  credit 
side  of  another  account. 


RECORDING  TRANSACTIONS  IN  THE  LEDGER. 


35 


cash  and  on  account),  performed  by  M.  E.  Studebaker  during  the  month  of  October, 
are  shown  recorded  direct  in  accounts  with  Cash,  customers,  creditors,  Capital, 
Sales,  Purchases,  and  Expense  in  Illustration  No.  13.  A  Trial  Balance  of  balances 
made  from   these  accounts  is  shown   in   Illustration   No.    14. 


Oct. 


I 

7 
10 

18 

24 

28 

31 


M.  E.  Studebaker  invested  $1,000.00  in  the  office  supplies  business. 

Purchased  from  A.  R.  King,  Clinton,  on  account,  merchandise,  $317  65. 

Received  $75.50  for  cash  sales  of  merchandise. 

Sold  E.  B.  Moore,  305  Elm  St.,  City,  on  account,  one  desk,  $75.00. 

Paid  A.  R.  King  $200.00  on  account. 

Sold  J.  W.  Macon,  222  Main  St.,  City,  on  account,  three  files,  $127.50. 

Paid  rent  of  store,  $50.00. 


Illustration  No.  14,  A  Trial  Balance  of  Balances  Made  from  the  Ledger  Accounts 

in  Illustration  No.  13. 


Exercise  No.  11,  Recording  Transactions  Direct  in  the  Ledger. 

Record  on  ledger  paper  the  following  transactions  performed  during  the  first 
half  of  May  by  R.  H.  Gillespie,  a  retail  clothing  dealer.  Allow  space  for  the  accounts 
as  follows:  Cash,  eight  lines;  Purchases,  nine  lines;  Sales,  eight  lines;  Exi^ense, 
six  lines;  R.  H.  Gillespie,  Capital,  five  lines;  A.  C.  Dugan,  A.  R.  Isaacs.  Charles 
Heaney,  Davis  Bros.,  Globe  Clothing  Co.,  and  Pope  Clothing  Co.,  each  four 
lines.     Give  each  customer  and  creditor  a  local  address. 

May     I.     R.  H.  Gillespie  invested  $2,500.00  in  the  retail  clothing  business. 

2.  Bought  of  Davis  Bros.,  on  account,  merchandise,  $318.67. 
Bought  of  Brand  Bros.,  for  cash,  merchandise,  $362.55. 

3.  Bought  of  the  Globe  Clothing  Co.,  on  account,  merchandise,  $196.50. 
Sold  A.  C.  Dugan,  on  account,  one  suit  of  clothes,  $65.00. 

4.  Bought  of  Brand  Bros.,  for  cash,  merchandise,  $318.62. 

5.  Sold  for  c<!sh  one  suit  of  clothes,  $65.00;    one  spring  overcoat,  $50.00. 

6.  Sold  A.  R.  Isaacs,  on  account,  one  suit   $60.00;    five  shirts  at  $2.50. 
9.     Paid  the  Globe  Clothing  Co.  $196.50  in  full  of  account. 

Sold  Charles  Heaney,  on  account,  one  suit,  $50.00;   one  vest,  $10.00, 

{Concluded  on  page  j6.) 


36  RECORDING  TRANSACTIONS  IN  THE  LEDGER. 

{Exercise  No.  ii — Continued  from  page  35.) 

May  10.     Bought  of  the  Pope  Clothing  Co.,  on  account,  merchandise,  $269.96. 
Sold  A.  C.  Dugan,  on  account,  one  spring  overcoat,  $85.00;   six  ties  at 
$1.25  each. 

11.  Received  $60.00  from  Charles  Heaney  in  full  of  account. 

12.  Bought  of  Brand  Bros.,  for  cash,  merchandise,  $327.16. 

13.  Paid  $12.00  for  telephone  service. 

14.  Received  $25.00  from  A.  R.  Isaacs  in  part  payment  of  the  merchandise 

sold  him  on  the  6th. 

15.  Bought  of  Davis  Bros.,  on  account,  merchandise,  $105.81. 
Paid  rent,  $80.00;   salaries  of  cterks,  $75.00. 

When  these  transactions  have  been  recorded  in  the  accounts,  prove  the  equality 
of  the  debits  and  credits  by  a  Trial  Balance  of  balances. 


Exercise  No.  12,  Recording  Transactions  Direct  in  the  Ledger. 

Record  on  ledger  paper  the  following  transactions  performed  during  the  month 
of  May  by  W.  L.  Kirby,  a  retail  paint  merchant.  Allow  space  for  the  accounts 
as  follows:  Cash,  eight  lines;  Purchases,  nine  lines;  Sales,  ten  lines;  Expense, 
four  lines;  W.  L.  Kirby,  Capital,  Jones  Bros.,  Cowan  Bros.,  W.  L.  Luttrell,  and 
W.  H.  Rowland,  each  four  lines;  C.  A.  Norman,  five  lines;  National  Paint  Co., 
and  Marcus  Franklin,  each  four  lines. 

May     I.     W.  L.  Kirby  invested  $2,500.oo^in  the  retail  paint  business. 

Bought  of  Jones  Bros.,  Uniontown,  on  account,  merchandise,  $221.35. 
Paid  one  month's  rent  in  advance,  $75.00. 
2.     Bought  of  Cowan  Bros.,  City,  ten  days,  merchandise,  $86.49. 

Sold  W.  L.  Luttrell,  City,  on  account,  merchandise  per  Sale  No.  i, 
$42.50.  The  sale  number  indicates  that  a  copy  of  the  list  of  items 
sold  has  been  retained. 

4.  Paid  the  National  Paint  Co.,  New  York,  cash  for  merchandise  delivered 

today,  $798.57. 

5.  Sold  W.  H.  Howland,  Middletown,  on  account,  per  Sale  No.  2,  $75.80. 
Received  for  cash  sales  of  merchandise,  $110.00. 

7.     Paid  Cowan  Bros.  $86.49  in  full  of  account. 

Sold  C.  A.  Norman,  City,  on  account,  merchandise  per  Sale  No.  3, 

$87.50. 
9.     Bought  of   National    Paint   Co.,    New   York,   twenty  days,   merchan- 
dise, $171.58.     - 
10.     Sold  W.  L.  Luttrell,  City,  on  account,  merchandise  per  Sale  No.  4, 

$78.75- 

•     II.  Received  $50.00  from  C.  A.  Norman  to  apply  on  account. 

12.  Bought  of  Cowan  Bros.,  City,  on  account,  merchandise,  $93.25. 

14.  Received  $75.80  from  W.  H.  Howland  in  full  of  account. 

16.  Bought  of  Marcus  Franklin,  Ardmore,  five  days,  merchandise,  $218.32. 

17.  Bought  of  Jones  Bros.,  Uniontown,  on  account,  merchandise,  $172.50. 

18.  Paid  Marcus  Franklin  $218.32  in  full  of  account. 

Sold  W.  H.  Howland,  Middletown,  on  account,  merchandise  per  Sale 
No.  5,  $88.50. 

19.  Sold  C.  A.  Norman,  City,  on  account,  merchandise  per  Sale  No.  6, 

$32.45- 
21.     Received  $30.00  from  W.  L.  Luttrell  to  apply  on  account. 

{Concluded  on  page  37.) 


RECORDING  TRANSACTIONS  IN  THE  JOURNAL.  37 

{Exercise  No.  12 — Continued  from  page  j6.) 

May  21.     Sold  C.  O.  Baily,  for  cash,  20  gallons  I.  X.  L.  paint  at  $4.75,  $95.00. 
24.     Paid  Jones  Bros.  $100.00  to  apply  on  account. 

C.  A.  Norman  returned  one  gallon  paint  purchased  from  us  on  the  19th 
and  was  granted  credit  for  $3.00.     He  paid  cash,  $29.45,  for  the  bal- 
ance due  on  this  sale. 
Enter  as  two  separate  transactions. 
26.     Gave  a  customer  $2.00  in  payment  for  paint  purchased  from  us  for  cash 

and  returned  per  agreement. 
29.     Paid  the  National  Paint  Co.  $171.58  in  full  of  account. 

C.  O.  Bailey  returned  2  gallons  I.  X.  L.  paint  purchased  on  the  21st 

and  accepted  in  exchange  for  it  4  gallons  varnish. 
No  entry  is  required.    Why? 
31.     Received  credit  from  Jones  Bros,  for  $12.00,  value  of  3  gallons  paint 

purchased  on  the  17th  and  returned  by  us  per  agreement. 
When  these  transactions  have  been  recorded  in  the  accounts,  prove  the  equality 
of  the  debits  and  credits  by  a  Trial  Balance  of  balances. 


RECORDING  TRANSACTIONS  IN  THE  JOURNAL 

§  36.  Transactions  with  the  owner  and  with  operating  expenses  may  be 
recorded  in  the  journal  in  the  same  manner  as  transactions  in  which  merchandise 
is  purchased  or  sold  for  cash  or  on  account.  When  the  owner  invests  cash  or  other 
assets  in  the  business,  the  transaction  is  recorded  in  the  journal  by  writing  the  date, 
tlie  name  of  the  account  debited  and  amount,  the  name  of  the  account  credited 
and  amount,  and  the  explanation,  in  the  same  form  as  other  transactions;  each 
asset  invested  is  debited  to  the  account  which  is  to  show  its  value,  and  the  owner's 
Capital  account  credited.  When  the  owner  withdraws  a  part  of  his  capital,  the 
transaction  is  recorded  in  the  journal  in  the  same  form  as  the  entry  for  investment; 
in  this  case,  however,  the  owner's  Capital  account  is  debited  with  the  amount  of 
the  withdrawal,  and  the  account  which  shows  the  value  of  the  asset  withdrawn 
is  credited.  When  operating  costs  are  paid,  the  transaction  is  recorded  in  the 
journal  by  writing  the  date,  the  name  of  the  operating  account  affected  (usually 
Expense)  and  the  amount  of  the  payment,  the  name  and  amount  of  the  asset  parted 
with,  and  the  explanation. 

Before  recording  transactions  in  the  journal,  the  student  should  journalize  each  one  mentally; 
that  is,  he  should  determine  from  the  nature  of  the  transaction  the  account  to  be  debited  and  the 
account  to  be  credited.  Since  the  information  the  owner  desires  is  obtained  from  the  accounts,  it 
is  essential  that  the  proper  accounts  be  debited  and  credited  in  each  transaction.  Thus  if  M.  E. 
Studebaker,  the  proprietor  of  the  business,  withdraws  from  the  business  $1,000.00  during  the  year, 
as  salary,  and  the  bookkeeper  debits  M.  E.  Studebaker  Capital  instead  of  Expense,  the  report  which 
Mr.  Studebaker  receives  from  his  bookkeeper  at  the  end  of  the  year  would  show  $1,000.00  less 
expenses  than  have  really  been  paid. 

The  following  transactions  relative  to  the  complete  operations  of  a  business 
(including  investment,  operating  cost,  and  the  purchases  and  sales  of  merchandise 
for  cash  and  on  account),  performed  by  M.  E.  Studebaker  during  the  month  of 
October,  are  shown  recorded  in  the  journal  in  Illustration  No.  15  and  posted  to 
the  ledger  in  Illustration  No.  16.  These  transactions  are  the  same  as  those  at 
the  top  of  page  35. 

Oct.     I.     M.  E.  Studebaker  invested  $1,000.00  in  the  office  supplies  business. 

7.     Purchased  from  A.  R.  King,  Clinton,  on  account,  merchandise,  $317.65. 
10.     Received  $75.50  for  cash  sales  of  merchandise. 

(Concluded  on  page  j 8.) 


38 


RECORDING  TRANSACTIONS. 


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Illustration  No.  15,  A  Journal  Page  with  Transactions  Recorded  on  It. 

EXPLANATION  The  transactions  recorded  in  this  illustration  are  given  at  the  bottom  of 
pages  37  and  38.  The  method  of  recording  is  the.  same  as  in  Illustrations  Nos.  7  and  xi.  The 
transactions  are  the  same  as  those  recorded  direct  in  the  ledger  in  Illustration  No.  13. 


{Continued  from  page  37.) 

Oct.  18.  Sold  E.  B.  Moore,  305  Elm  St.,  City,  on  account,  one  desk,  $75.00. 

24.  Paid  A.  R.  King  $200.00  on  account. 

28.  Sold  J.  W.  Macon,  222  Main  St.,  City,  on  account,  three  files,  $127.50. 

31.  Paid  rent  of  store,  $50.00. 


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Oi^.    J/ 


RECORDING  TRANSACTIONS. 


39 


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Illustration  No.  i6,  A  Ledger  with  Eight  Accounts  Resulting  from  Posting. 

EXPLANATION.  This  ledger  shows  the  posting  of  the  transactions  recorded  in  the  journal, 
Illustration  No.  15.  A  comparison  of  Illustration  No.  13  with  this  illustration  will  show  that  the 
facts  are  the  same,  except  the  folio  columns  are  used  in  the  illustration  above. 


40  EXERCISES  IN  RECORDING  TRANSACTIONS. 

Exercise  No.  13,  Recording  Transactions  in  the  Journal  and  Posting. 

Record  on  journal  paper  the  following  transactions  performed  during  the 
month  of  January  by  E.  B.  Taylor,  a  retail  grocer: 

Jan.     I.  E.  B.  Taylor  invested  $1,000.00  in  the  retail  grocery  business. 

2.  Bought  of  E.  C.  Cline,  Chicago,  on  account,  merchandise,  $77.30. 

3.  Bought  of  Langley  Bros.,  City,  thirty  days,  merchandise,  $134.95. 

4.  Paid  $20.00,  city  and  state  license  for  one  year. 

6.     Sold  A.  R.  Manley,  106  Elm  St.,  City,  on  account,  40  lbs.  Arbuckle 
coffee  at  20c;    i  bbl.  White -Lily  flour,  $6.25. 
When  the  sale  includes  more  than  one  item,  the  explanation  in  the  journal  should  be  as 
follows : 

Sold  on  account: 
40  lbs.  Arbuckle  Coffee  at  20C,  S'8.00. 
I  bbl.  White  Lily  Flour  6.25. 

10.     Paid  J.  F.  Sherwood  $192.00  for  merchandise  purchased  today. 

12.  Received  $30.50  for  sundry  cash  sales. 

13.  Paid  E.  C.  Cline  $77.30  in  full  of  account. 

16.  Sold  Gibson  Hotel,  12  E.  4th  St.,  City,  ten  days,  6  bbls.  Roller  King 

flour  at  $5.10;    3  bbls.  White  Lily  flour  at  $6.25;    40  lbs.  Arbuckle 
coffee  at  20c. 

17.  Sold  T.  L.  Staples,  Clinton,  sixty  days,  4  bbls.  Roller  King  flour  at  $5.10; 

4  cans,  200  lbs.,  lard  at  15c. 
20.     Received  $10.00  from  A.  R.  Manley  to  apply  on  account. 
23.     Bought  of  Logan  &  Moseley,   Centerville,   twenty  days,   merchandise, 

$228.60. 

26.  Sold  A.  R.  Manley,  106  Elm  St.,  City,  on  account,  5  bbls.  White  Lily 

flour  at  $6.25;    115  lbs.  Arbuckle  coffee  at  20c. 

27.  Received  $30.50  from  the  Gibson  Hotel  to  apply  on  account. 
30.     Received  $41.85  for  sundry  cash  sales. 

When  the  above  transactions  have  been  recorded  in  the  journal  as  instructed 
open  accounts  in  the  ledger  with  Cash  (9),  Purchases  (8),  Sales  (10),  Expense  (5), 
E.  B.  Taylor,  Capital  (5),  E.  C.  Cline  (4),  Langley  Bros.  (4),  A.  R.  Manley  (4), 
Gibson  Hotel  (4),  T.  L.  Staples  (4),  Logan  &  Moseley  (4),  allowing  for  each  account 
the  number  of  lines  indicated;  post  the  transactions,  and  prove  the  posting  by  a 
Trial  Balance  of  totals. 


Exercise  No.  14,  Recording  Transactions  in  the  Journal  and  Posting. 

Record  on  journal  paper  the  following  transactions  performed  during  the 
month  of  July  by  E.  H.  W^eatherby,  a  retail  grocer; 

July     I.     E.  H.  Weatherby  invested  $1,500.00  in  the  retail  grocery  business. 

2.  Bought  from  Woodward  Bros.,  Morgantown,  on  account,  merchandise, 

$127.60. 

3.  Bought  from  Winters  &  Gay,   Batesville,  on  thirty  days'   time,   mer- 

chandise, $204.05. 
Paid  $20.00  cash  for  city  and  state  license. 

5.  Sold  J.  A.  Taylor,  22  Poplar  St.,  on  account,  25  lbs.  roasted  coffee  at 

33c;   50  lbs.  granulated  sugar  at  7c;   60  lbs.  bacon  at  23c. 
Bought  from  Chafin  &  Jones,  City,  for  cash,  merchandise,  $242.00. 

6.  Received  $22.50  for  sundry  cash  sales  to  date. 
Paid  Woodward  Bros.  $127.60  in  full  of  account. 

{Concluded  on  page  41.) 


EXERCISES  IN  RECORDING  TRANSACTIONS. 


41 


(Exercise  No.  14 — Continued  from  page  40.) 

Sold  the  Colonial  Hotel,  Washington  Ave.,  on  account,  5  bbls.  Blue 
Ribbon  flour  at  $Q.io;  3  bbls.  White  Rose  flour  at  $9.75;  90  lbs. 
granulated  sugar  at  7c. 

Received  $15.00  from  J.  A.  Taylor  to  apply  on  account. 

Bought  from  Winters  &  Gay,  Batesville,  on  thirty  days'  time,  merchan- 
dise, $209.58. 

Received  $40.00  from  the  Colonial  Hotel  in  part  payment  for  merchan- 
dise sold  on  the  8th. 

Paid  Winters  &  Gay  $100.00  to  apply  on  purchase  of  the  3d. 
Sold  M.  J.  Sanders,  227  Beech  St.,  on  account,  5  bbls.,  White  Rose  flour 
at  $9.75;    10  hams,  191  lbs.,  at  26c. 

Bought  from  Woodward  Bros.,  Morgantown,  on  account,  merchandise, 
$216:37. 

Sold  the  Colonial  Hotel,  Washington  Ave.,  on  account,  7  doz.  cans 
peaches  at  $1.75  per  doz.;  2,000  lbs.  bran  at  $16.25  per  1,000  lbs. 

Bought  from  the  Perfection  Creamer^^  Rosedale,  on  twenty  days'  time, 
merchandise,  $34.45. 

Received  $30.00  from  M.  J,  Sanders  to  apply  on  account. 

Bought  from  Chafin  &  Jones,  City,  for  cash,  merchandise,  $116.60. 

Sold  W.  W.  Johnston,  122 1  Elm  St.,  on  account,  2,000  lbs.  bran  at  $16.25 
per  1,000  lbs.;  200  lbs.  lard  at  22c;  3  doz.  cans  peaches  at  $1.60  per 
doz.  cans. 

Paid  Winters  &  Gay  $104.05,  balance  due  on  purchase  of  the  3d. 
Received  $52.50  for  sundry  cash  sales  to  date. 

Sold  W.  W.  Johnston,  1221  Elm  St.,  on  account,  100  lbs.  granulated 
sugar  at  7c;    10  bbls.  White  Rose  flour  at  $9.75. 

Bought  from  the  Perfection  Creamery,  Rosedale,  on  twenty  days'  time, 
merchandise,  $167.55. 

Received  $50.00  from  the  Colonial  Hotel  in    full  for  balance  due  on 

sale  of  the  8th,  and  on  account  of  sale  of  the  i6th. 
Paid  Winters  &  Gay  $200.00  on  account  of  purchase  of  the  loth. 

Received  $10.55  from  J.  A.  Taylor  in  payment  for  balance  due  on  mer- 
chandise sold  him  on  the  5th. 

Sold  L.  S.  Lynn,  915  Jefferson  Ave.,  on  account,  5  bbls.  White  Rose  flour 
at  $9.75;    10  lbs.  creamery  butter  at  42c. 

Received  $40.00  from  L.  S.  Lynn  to  apply  on  account. 

Paid  Woodward  Bros.  $200.00  on  account  of  purchase  of  the  15th. 

Paid  bookkeeper's  salary,  $60.00;  rent,  $50.00;  telephone  service,  $10.00. 


42  QUESTIONS  ON  RECORDING  TRANSACTIONS. 

QUESTIONS 

1.  Name  some  of  the  necessary  expenses  of  a  grocery  business. 

2.  Can  you  suggest  a  plan  which  would  permit  the  grocer  to  know  the  cost  of 

delivering  merchandise? 

3.  What  accounts  are  afTected  when  cash  is  paid  for  telephone  service? 

4.  What  effect  would  it  have  on  the  operating  cost  of  the  business  if  the  salary 

paid  the  owner  for  his  services  in  connection  with  the  business  were  debited 
to  his  Capital  account? 

5.  Name  the  account  debited  and  the  account  credited  when  merchandise  is 

invested  at  the  beginning  of  business. 

6.  What  accounts  are  affected  when  cash  and  merchandise  are  invested  at  the 

beginning  of  business? 

7.  What  must  the  owner  of  a  business  take  into  consideration  when  he  fixes  the 

selling  price  of  the  merchandise  which  the  business  offers  for  sale? 

8.  Name  some  of  the  expenses  in  connection  with  the  operation  of  a  railroad. 

9.  If  a  farmer  shows  all  of  his  operating  cost  in  one  account,  name  some  of  the 

expenses  which  would  be  debited  to  this  account. 

10.  If  a  merchant  pays  $25  00  for  drayage  on  merchandise  he  has  purchased, 

would  this  be  debited  to  the  Expense  or  the  Purchases  account?  Give 
reasons  for  your  answer. 

11.  What  accounts  are  affected  when  the  owner  withdraws  a  part  of  his  capital? 

12.  Name  the  account  debited  and  the  account  credited  when  the  owner  invests 

cash  in  the  business  at  a  time  other  than  the  beginning  of  the  business. 

13.  If  a  telephone  company  pays  $2,000.00  for  wire  used  in  connection  with  the 

service  rendered  its  customers,  will  this  be  debited  to  the  Expense  account? 

14.  If  a  railroad  company  pays  $8,000.00  for  a  new  engine,  will  this  be  debited  to 

the  Expense  account? 

15.  What  accounts  are  affected  when  stamps,  debited  to  Expense  when  purchased, 

are  used  for  parcel  post  on  a  package  containing  merchandise  sold  a  cus- 
tomer on  account,  with  the  agreement  that  he  is  to  pay  the  postage? 

16.  Name  the  account  debited  and  the  account  credited  if  the  sale  mentioned  in 

the  preceding  question  had  been  made  for  cash  and  the  customer  had  given 
the  business  cash  for  the  merchandise  and  stamps. 

17.  If  Robert  A.  Clark,  the  owner  of  a  business,  is  to  receive  a  salary  of  $200.00 

a  month  for  his  services  rendered  to  the  business  and  this  is  withdrawn  at 
diflerent  times,  what  would  be  the  name  of  the  account  kept  with  the  trans- 
actions affecting  this  salary? 

18.  What  accounts  would  be  affected  when  the  entry  was  made  at  the  end  of  the 

month  for  the  $200.00  salary   (s33,   page  33)? 

19.  Name  the  account  debited  and  the  account  credited  if  Mr.  Clark  accepted 

merchandise  from  stock  at  cost  price  in  payment  for  a  part  of  his  salary. 

20.  What  accounts  would  be  afiected  if  Mr.  Clark  accepted  merchandise  from 

stock  at  the  selling  price  in  payment  for  a  part  of  his  salary? 

21.  What  entry  would  be  required  if  one  customer  was  debited  with  merchandise 

purchased  by  another  customer? 

22.  Name  some  of  the  transactions  which  might  occur  in  connection  with  the 

complete  operations  of  a  hardware  business. 

23.  Name  some  of  the  transactions  which  might  occur  in  connection  with  the 

complete  operations  of  a  plumbing  business. 

24.  Under  what  circumstances  would  you  advise  the  keeping  of  more  than  one 

account  with  the  expenses  of  a  business? 

25.  Name  some  of  the  transactions  which  might  be  performed  in  connection  with 

the  operations  of  a  dairy. 


Chapter  V 

RECORDING  TRANSACTIONS— Concluded 

§  37.  Special  Journals.  While  all  transactions  may  be  recorded  in  the 
journal  as  explained  in  §  22,  yet  it  is  not  customary  to  do  this  because  efticiency  in 
bookkeeping  means  the  greatest  amount  of  work  with  the  best  results  at  the  least 
cost.  When  a  number  of  transactions  affect  the  same  account,  much  time  can  be 
saved  by  recording  them  in  special  journals.  Fifty  purchases  during  one  month 
recorded  in  the  journal  would  require  writing  "Purchases"  fifty  times  and  posting 
fifty  separate  amounts  to  the  Purchases  account.  In  addition  to  the  extra  time 
required  in  recording  the  transactions  and  posting,  fifty  lines  would  be  needed  in 
the  ledger  for  the  Purchases  account.  If  these  transactions  were  recorded  in  a 
journal  and  no  other  transactions  were  recorded  in  this  journal,  it  would  not  be 
necessary  to  write  "Purchases"  in  each  transaction  and  the  total  could  be  posted 
to  the  Purchases  account  in  one  amount  at  the  end  of  the  month,  thus  saving 
practically  half  the  time  in  the  recording  and  posting  of  these  transactions.  In 
addition  to  the  time  saved  in  posting,  forty-nine  lines  will  be  saved  in  the  ledger 
as  a  result  of  posting  the  total  purchases  in  one  amount. 

In  a  mercantile  business  the  transactions  which  are  of  the  most  frequent 
occurrence  are  those  in  connection  with  the  purchase  and  sale  of  merchandise  and 
the  receipt  and  payment  of  cash.  If  these  transactions  are  recorded  in  special 
journals,  the  work  in  the  accounting  department  will  be  much  more  efficient,  and, 
where  the  volume  of  business  is  large  and  more  than  one  bookkeeper  is  needed,  the 
several  bookkeepers  can  use  the  different  journals  without  interfering  with  the 
work  of  each  other. 

The  title  of  any  special  journal  is  usually  the  name  of  the  account  affected  by  posting  the 
total  at  the  end  of  the  month.  Thus,  the  journal  in  which  purchases  are  recorded  is  usually  referred 
to  as  the  purchases  journal  because  the  Purchases  account  will  be  debited  with  the  total,  and  the 
journal  in  which  sales  are  recorded  is  referred  to  as  the  sales  journal  because  the  Sales  account  will 
be  credited  with  the  total. 

§  38.  The  Purchases  Journal  is  a  book  of  original  entry  in  which  all  pur- 
chases of  merchandise  are  recorded  and  no  other  transactions  are  recorded  in  it. 
The  complete  record  of  a  transaction  in  which  merchandise  is  purchased  includes 
the  date  of  entry,  the  name  and  address  of  the  person  or  firm  from  whom  the  mer- 
chandise is  purchased,  the  terms,  the  number  of  the  purchase  and  the  amount  of 
the  purchase.  The  ruling  in  the  purchases  journal  should  be  so  arranged  that  all 
this  information  can  be  recorded  on  one  line.  When  arranged  in  this  manner,  each 
person  or  firm  from  whom  merchandise  is  purchased  can  be  credited  in  his  account 
in  the  ledger,  and  the  Purchases  account  debited  for  the  total  at  the  end  of  the 
month.     Illustration   No.    17  shows  one  form  of  the  purchases  journal. 

If  cash  purchases  are  recorded  in  the  cash  book  (§  43),  it  is  not  necessary  to  record  them  in 
the  purchases  journal.    This  is  explained  further  in  connection  with  the  discussion  of  the  cash  book. 

The  following  purchases  of  merchandise  made  by  E.  B.  Taylor,  a  retail  grocer, 
during  the  month  of  January,  are  shown  recorded  in  the  purchases  journal  in 
Illustration  No.  17: 

Jan.     2.     Bought  of  E.  C.  Cline,  Chicago,  on  account,  merchandise,  $77.30. 

3.     Bought   of   Langley   Bros.,    City,   on    thirty   days'    time,    merchandise, 

$i34-95- 
23.     Bought  of  Logan  &  Moseley,  Centerville,  on  twenty  days'  time,  mer- 
chandise, $228.60. 

43 


44    RECORDING  TRANSACTIONS  IN  THE  PURCHASES  JOURNAL 


JJ^Z^'7'l..i,.t^ist.^y*'^,  /j^J?^- 


Date 


L.F. 


Account  Credited 


Address 


Terms 


Pur. 
No. 


Amount 


^0 


3  / 


^^^^^4.^ 


(_,-/^^<''OT^C-e?'i^ 


»S'\ 


^^oVs 


Illustration  No.  17,  Purchases  Journal. 

EXPLANATION.  Each  transaction  is  recorded  on  one  horizontal  line.  The  information 
in  the  "Pur.  No."  column  refers  to  the  list  of  merchandise  (invoice)  sent  by  the  seller  to  the  pur-^- 
chaser;  this  list  is  filed  for  future  reference.  The  entire  record  in  this  illustration  is  equivalent 
to  one  journal  entry  in  which  the  Purchases  account  is  debited  and  three  personal  accounts  credited. 

§  39.  Posting  from  the  Purchases  Journal.  The  accounts  affected  by 
each  transaction  recorded  in  the  purchases  journal  are  Purchases  (debit)  and  the 
account  of  the  person  or  firm  (credit);   for  this  reason,  each  amount  entered  in  the 

{Concluded  on  page  43.) 

— : ^j3,_  (3^f^j^  ^ 


Osz^^n^^   {   ^i:p ,::^C!>y^        ^A        /vi'vi^. 


Illustration  No.  18,  Ledger  Resulting  from  Posting  Illustration  No.  17. 

EXPLANATION.  A  Trial  Balance  from  this  ledger  will  show  that  the  debit  amount  is 
equal  to  the  credit  amounts  even  though  the  record  in  the  accounts  does  not  represent  all  of  the 
transactions  that  the  business  would  perform.  One  purpose  of  this  illustration  is  to  show  that  the 
ledger  is  in  balance  when  all  the  transactions  from  any  one  journal  have  been  posted. 


RECORDING  TRANSACTIONS  IN  THE  PURCHASES  JOURNAL.    45 

money  column  is  posted  to  the  credit  of  the  account  written  on  the  same  line  with 
it,  and  the  Purchases  account  is  debited  at  the  end  of  the  month  with  the  total. 
The  posting  is  the  same  as  in  the  journal,  except  that  the  amounts  debited  to 
Purchases  are  grouped  and  posted  at  one  time;  the  posting  to  the  accounts  with 
creditors  should  be  daily,  and  the  posting  of  the  total  to  the  Purchases  account, 
monthly.  The  date,  the  letter  "P"  and  the  page  of  the  purchases  journal  are 
entered  in  the  ledger;  the  letter  "P"  indicates  the  title  of  the  book  of  original 
entry.  If  a  specific  time  of  payment  is  stated,  this  should  be  written  in  the  explana- 
tion column  of  the  ledger  as  explained  in  Illustration  No.  i.  The  page  of  the 
ledger  is  written  in  the  folio  column  of  the  purchases  journal  to  indicate  where 
the  entry  has  been  posted. 

The  posting  of  the  transactions  recorded  in  the  purchases  journal,  Illustration 
No.  17,  is  shown  in  Illustration  No.  18. 

Exercise  No.  15,  Recording  Transactions  in  the  Purchases  Journal. 

Record  in  the  purchases  journal  (paper  ruled  similar  to  Illustration  No.  17) 
the  following  transactions  relative  to  the  purchase  of  merchandise  during  the  month 
of  February  by  W.  O.  Gardner,  who  is  engaged  in  the  hardware  business: 

Feb     I.     B.  A.  Ames,  Toledo,  30  days,  Purchase  No.  i,  $350.00. 

5.     H.  M.  Lowe,  Nashville,  Feb.  3,  30  days.  Purchase  No.  2,  $325.00. 

In  this  purchase  the  merchandise  was  shipped  Feb.  3  and  received  Feb.  5;  the  amount  is 
due  30  days  from  Feb.  3. 

9.  H.  T,  Harris,  Rochester,  20  days.  Purchase  No.  3,  $486.00. 

12.  J.  T.  Goodrich,  City,  Feb.  10,  90  days.  Purchase  No.  4,  $825.00. 

18.  J.  P.  Benson,  Cleveland,  Feb.  17,  60  days.  Purchase  No.  5,  $64.00. 

23.  C.  O.  Parsons,  City,  30  days,  Purchase  No.  6,  $128.00. 

28.  H.  L.  Simpson,  Dayton,  Feb.  26,  30  days.  Purchase  No.  7,  $242.00. 

When  the  above  transactions  have  been  recorded  in  the  purchases  journal  as 
instructed,  and  the  purchases  journal  ruled  as  in  Illustration  No.  17,  open  accounts 
on  a  sheet  of  ledger  paper  with  Purchases  and  each  of  the  seven  creditors,  allowing 
four  lines  for  each  account.  When  the  posting  has  been  completed,  prove  the 
equality  of  the  debits  and  credits  by  a  Trial  Balance. 

Exercise  No.  16,  Recording  Transactions  in  the  Purchases  Journal. 

Record  in  the  purchases  journal  the  following  transactions  relative  to  the 
purchase  of  merchandise  during  the  month  of  January  by  H.  H.  Goodman,  a  retail 
grocer : 

Jan.     2.  Brown  &  Co.,  Elmwood,  on  account,  Purchase  No.  i,  $77.30. 

3.  Knox  Bros.,  City,  on  account.  Purchase  No.  2,  $134.95. 

10.  Hazen  &  Lockhart,  Danville,  on  account.  Purchase  No.  3,  $228.60. 
15.  Brown  &  Co.,  Elmwood,  on  account.  Purchase  No.  4,  $226.00. 

17.     Lake  View  Creamery,  Lake  View,  Jan.   14,  20  days,  Purchase  No.  5, 

$28.00. 
23.     J.  Allen  Smith  &  Co.,  Rockford,  10  days,  Purchase  No.  6,  $197.10. 
27.     Donaldson  Bros.,  City,  Jan.  24,  account.  Purchase  No.  7,  $172.75. 

When  the  above  transactions  have  been  recorded  in  the  purchases  journal  as 
instructed,  and  the  purchases  journal  ruled,  open  accounts  on  a  sheet  of  ledger 
paper  with  Purchases  and  each  of  the  six  creditors,  allowing  five  lines  for  Brown 
&  Co.  and  four  lines  for  each  of  the  other  accounts.  When  the  posting  has  been 
completed,  prove  the  equality  of  the  debits  and  credits  by  a  Trial  Balance. 

After  the  instructor  has  approved  this  exercise,  retain  the  purchases  journal 
only  for  use  in  connection  with  Exercise  No.  22. 


46  RECORDING  TRANSACTIONS  IN  THE  SALES  JOURNAL. 

Exercise  No.  17,  Recording  Transactions  in  the  Purchases  JournaL 

Record  in  the  purchases  journal  the  following  transactions  relative  to  the 
purchase  of  merchandise  during  the  month  of  March  by  C.  U.  Steele,  a  retail  shoe 
dealer: 
March     2.     Bay  State  Shoe  Co.,  Boston,  Feb.  28,  10  days,  Purchase  No.  i,  $496.81. 

3.  Haynes,  Henson  &  Co.,  Newark,  N.  J.,  Mar.  2,  10  days.  Purchase  No. 

2,  $387-65- 

4.  M.  B.  Lang,  City,  Mar.  3,  30  days.  Purchase  No.  3,  $1,691.42. 

6.     Cline  Shoe  Co.,  Pittsburgh,  Mar.  4,  30  days.  Purchase  No.  4,  $168.42.' 
18. .   Bay  State  Shoe  Co.,  Boston,  Mar.  15,  30  days.  Purchase  No.  5,  $987.35. 

25.  Haynes,  Henson  &  Co.,  Newark,  N.  J.,  Mar,  20,  30  days.  Purchase 

No.  6,  $462.85. 

26.  Cline  Shoe  Co.,  Pittsburgh,  Mar.  20,  30  days,  Purchase  No.  7,  $785.00. 
31.     A.  O.  Haines,  Albany,  Mar.  21,  60  days,  Purchase  No.  8,  $432.50; 

M.  B.  Lang,  City,  Mar.  22,  30  days.  Purchase  No.  9,  $356.00. 

When  the  above  transactions  have  been  recorded  in  the  purchases  journal  as 
instructed,  and  the  purchases  journal  ruled,  open  an  account  with  Purchases  at 
the  top  of  page  i  of  a  double  sheet  of  ledger  paper,  and  an  account  with  each  of 
the  five  creditors  on  page  2  of  the  same  sheet,  allowing  equal  space  for  each  personal 
account;    prove  the  equality  of  the  debits  and  credits  by  a  Trial  Balance. 

If  double  ledger  paper  ruled  with  from  thirty  to  forty  horizontal  lines  on  each  page  can  not 
be  obtained,   use  any  ledger  paper  available  and  allow  five  lines  for  each  account. 

After  the  instructor  has  approved  this  exercise,  retain  the  ledger  sheet  only 
for  use  in  Exercises  Nos.  20  and  23. 

§  40.  The  Sales  Journal  is  a  book  of  original  entry  in  which  all  sales  of 
merchandise  on  account  are  recorded  and  no  other  transactions  are  recorded  in  it. 
The  complete  record  of  a  transaction  in  which  merchandise  is  sold  on  account 
includes  the  date  of  the  sale,  the  name  and  address  of  the  person  or  firm  to  whom 
the  merchandise  is  sold,  the  terms,  a  list  of  the  items  sold,  and  the  amount  of  the 
sale.  It  is  necessary  for  the  seller  to  retain  a  record  of  the  items  sold  a  customer 
on  account  because  this  information  will  be  needed  in  case  adjustments  are  required. 
If  a  customer  returns  merchandise  which  he  claims  was  purchased  froin  the  seller 
and  the  seller  has  no  record  of  the  items  sold  to  this  customer,  he  might  be  imposed 
on  by  allowing  credit  for  merchandise  which  was  not  purchased  from  him. 

Illustration  No.  19  shows  a  form  of  sales  journal  containing  a  list  of  the  items 
sold,  and  Illustration  No.  20  the  same  sales  recorded  in  a  sales  journal  with  the 
list  of  items  indicated  by  the  sale  number.  The  method  shown  in  Illustration  No. 
20  is  more  efficient  because  it  requires  less  time  to  record  a  number  than  a  list  of 
articles  sold.    The  other  form  is  shown  because  it  is  used  by  some  business  concerns. 

If  cash  sales  are  recorded  in  the  cash  book  (§  43),  it  is  not  necessary  to  record  them  in  the 
sales  journal.     This  is  explained  further  in  connection  with  the  discussion  of  the  cash  book. 

The  following  sales  made  by  E.  B.  Taylor,  a  retail  grocer,  during  the  month 
of  January,  are  shown  recorded  in  the  sales  journals  in  Illustrations  Nos.  19  and  20. 

Jan.     6.     Sold  A.  R.  Manley,  106  Elm  St.,  City,  on  account,  40  lbs.  Arbuckle  coffee 
at  20c;    I  bbl.  White  Lily  flour,  $6.25. 

16.  Sold  Gibson  Hotel,  12  E.  4th  St.,  City,  on  ten  days'  time,  6  bbls.  Roller 

King  flour  at  $5.10;    3  bbls.  White  Lily  flour  at  $6.25;    40  lbs.  Ar- 
buckle coffee  at  20c. 

17.  Sold  T.  L.  Staples,  Clinton,  on  sixty  days'  time,  4  bbls.  Roller  King  flour 

at  $5.10;  4  cans,  200  lbs.,  lard  at  15c. 
26.     Sold  A.  R.  Manley,  106  Elm  St.,  City,  on  account,  5  bbls.  White  Lily 
flour  at  $6.25;    115  lbs.  Arbuckle  coffee  at  20c. 


RECORDING  TRANSACTIONS  IN  THE  SALES  JOURNAL. 


47 


jL4z.-?^,-<t.€--tfZ-<7<-2V    ^,    /  'f  >■ 


/  6> 


^^ 


^ 


J_ 


TJ  ^^ 


7-a 


A^a 


^\o 


3  / 


.:^o 


7-3 


\     I    i 


^l:> 


v/"<?  4^(? 


^y"^ 


x^ 


2..S- 


Illustration  No.  19,  Sales  Journal  Containing  a  List  of  Items  Sold. 
EXPLANATION.     The  transactions  recorded  in  this  sales  journal  are  equivalent  to  a  journal 
entry  in  which  four  accounts  are  debited,  each  for  the  amount  written  on  the  same  line  with  it,  and 
the  Sales  account  credited  for  the  total.     Each  entry  shows  the  date,  the  name  and  address  of  the 
customer,  the  total  amount  of  the  sale,  and  a  list  of  the  items  sold. 


;  ''7^ 


Account  Debited 


Sato 
Bo. 


3  / 


'<^  ^^^^Aa^^C^'!^ 


/A(>J 


-^7 


yJ'^T'J' 


^ 


^0 


>s 


Illustration  No.  20,  Sales  Journal  Without  a  List  of  Items  Sold. 
EXPLANATION.     The  above  facts  are  the  same  as  those  in  Illustration  No.  19,  except  the 
articles  are  not  itemized.     Information  concerning  these  is  obtained  from  a  copy  of  the  sale  (sales 
ticket). 


48 


RECORDING  TRANSACTIONS  IN  THE  SALES  JOURNAL. 


§  41.  Posting  from  the  Sales  Journal.  The  accounts  affected  by  each 
transaction  recorded  in  the  sales  journal  are  the  customer  (debit)  and  Sales  (credit) ; 
for  this  reason  each  amount  written  on  the  line  with  the  name  of  the  customer 
is  posted  to  the  debit  of  his  account,  and  the  Sales  account  is  credited  with  the 
total  at  the  end  of  the  month.  The  posting  of  the  amounts  to  accounts  with  cus- 
tomers is  daily,  and  the  total  to  the  Sales  account,  monthly.  The  date,  the  letter 
"S"  and  the  page  of  the  sales  journal  are  entered  in  the  ledger;  the  letter  "S"  in- 
dicates the  title  of  the  book  of  original  entry-  If  a  specific  time  of  payment  is 
stated,  this  should  be  written  in  the  explanation  column  of  the  ledger  as  explained 
in  Illustration  No.  i.  The  page  of  the  ledger  is  written  in  the  folio  column  of  the 
sales  journal  to  indicate  where  the  entry  has  been  posted. 

The  posting  of  the  transactions  recorded  in  the  sales  journal.  Illustration  No. 
19  or  No.  20,  is  shown  in  Illustration  No.  21. 


C    ^Sl^^r^^J/r.Clcty. 


x€.\^^yJA:(2^. 


UtZyTTy.       /C         ^<y    ^^Z'GC'Ud^  ^ . 


Illustration  No.  21,  Ledger  Resulting  from  Posting  Illustration  No.  19  or  No.  20. 

EXPLANATION.     The  same  explanation  applies  here  as  that  given  in  connection  with  the 
ledger  resulting  from  posting  the  transactions  from  the  purchases  journal,  Illustration  No.   18. 


Exercise  No.  18,  Recording  Transactions  in  the  Sales  Journal. 

Record  in  the  sales  journal  (paper  ruled  similar  to  Illustration  No,  20)  the 
following  transactions  relative  to  the  sale  of  merchandise  on  account  during  the 
month  of  February  by  W.  J.  Wheeler,  a  retail  merchant: 
Feb.     3.     E.  M.  Miller,  507  Gay  St.,  Sale  No.  i,  $25.50. 

8.     William  A.  Wallace,  Evanston,  Sale  No.  2,  $14.50. 
{Concluded  on  page  4g.) 


RECORDING  TRANSACTIONS  IN  THE  SALES  JOURNAL.  49 

{Exercise  No.  18 — Continued  from  page  48.) 
Feb.  12.     B.  T.  Hart  &  Co.,  Maryville,  Sale  No.  3,  $32.50. 
14.     D.  T.  Sinton,  Uniontown,  Sale  No.  4,  $41.65. 

18.  G.  L.  Frye,  29  Main  St.,  Sale  No.  5,  $12.75. 

20.  The  Long  Construction  Co.,  Uniontown,  30  days,  Sale  No.  6,  $142.50. 

23.  Henry  Mason,  64  Union  St.,  Sale  No.  7,  $21.55. 

27.  D.  P.  Lewis,  310  Chestnut  St.,  Sale  No.  8,  $9.75. 

28.  Maynard  Pritchett,  Brookville,  30  days,  Sale  No.  9,  $65.25. 

When  the  above  transactions  have  been  recorded  in  the  sales  journal  as  in- 
structed, and  the  sales  journal  ruled  as  in  Illustration  No.  20,  open  accounts  on  a 
sheet  of  ledger  paper  with  Sales  and  each  of  the  nine  customers,  allowing  four 
lines  for  each.    When  the  posting  has  been  completed,  take  a  Trial  Balance. 

Exercise  No.  19,  Recording  Transactions  in  the  Sales  JoumaL 

Record  in  the  sales  journal  (journal  paper  ruled  similar  to  Illustration  No.  19) 
the  following  transactions  relative  to  the  sale  of  merchandise  during  the  month  of 
January  by  H.  H.  Goodman,  a  retail  grocer: 

Jan.     4.     A.  R.  Jennings,  105  Main  St.,  20  lbs.  roasted  coffee  at  33c;    100  lbs. 

granulated  sugar  at  7c;  50  lbs.  bacon  at  23c. 
8.     Central  Hotel,  22  Walnut  St.,  5  bbls.  Blue  Ribbon  flour  at  $9.25;  4  hams, 

100  lbs.,  at  26c;    100  lbs.  granulated  sugar  at  7c. 
II.     A.  R.  Jennings,  105  Main  St.,  i  doz.  cans  tomatoes,  $2.00;   4  cans,  216 

lbs.,  lard  at  26c. 
13.     M.  A.  Johnson,  Kingston,  5  bbls.  White  Rose  flour  at  $9.75;  6  hams,  141 

lbs.,  at  26c. 
16.     Imperial  Hotel,  200  Locust  St.,  5  bbls.  Blue  Ribbon  flour  at  $9.25;    100 

lbs.  granulated  sugar  at  7c. 

19.  A.  C.  Williams,  1221  Elm  St.,  12  doz.  cans  peaches  at  $1.80  per  doz.; 

2,000  lbs.  bran  at  $16.25  per  1,000  lbs. 
22.     R.  G.  Mathews,  25  E.  Fourth  St.,  10  bu.  meal  at  $1.10;   5  bu.  beans  at 
$3.20;   3  doz.  cans  peaches  at  $1.80  per  doz. 

25.  Imperial  Hotel,  200  Locust  St.,  5  bbls.  White  Rose  flour  at  $9.75;    25 

lbs.  creamery  butter  at  41c. 

26.  J.  C.  Wilson,  270  Central  Ave.,  2,000  lbs.  bran  at  $16.25  per  1,000  lbs.; 

5  cans,  248  lbs.,  lard  at  26c. 

27.  C.  L.  Loyd,  1604  Vine  St.,  100  lbs.  brown  sugar  at  63/2c;    100  lbs.  gran- 

ulated sugar  at  7c;  5  bbls.  White  Rose  flour  at  $9.75. 

When  the  above  transactions  have  been  recorded  in  the  sales  journal  as  in- 
structed, and  the  sales  journal  ruled  as  in  Illustration  No.  19,  open  accounts  on  a 
sheet  of  ledger  paper  with  Sales  and  each  of  the  eight  customers,  allowing  five 
lines  each  for  A.  R.  Jennings  and  Imperial  Hotel  and  four  lines  for  each  of  the 
other  accounts.     When  the  posting  has  been  completed,  take  a  Trial  Balance. 

After  the  instructor  has  approved  this  exercise,  retain  the  sales  journal  only 
for  use  in  connection  with  Exercise  No.  22. 

Exercise  No.  20,  Recording  Transactions  in  the  Sales  Journal. 

Record  in  the  sales  journal  (journal  paper  ruled  similar  to  Illustration  No.  19) 
the  following  transactions  relative  to  the  sale  of  merchandise  during  the  month  of 
March  by  C.  U.  Steele,  a  retail  shoe  dealer: 

March     i.     R.  L.  Watson,  207  Mason  St.,  i  pr.  Queen  City  shoes,  $10.50. 
4.     C.  A.  Sheppard,  Canton,  3  prs.  Ladies'  shoes  at  $4.00. 
9.     J.  C.  Wilson  &  Co.,  Hamilton,  8  prs.  Men's  Calf  shoes  at  $2.50;    14 
prs.  Men's  Jefferson  shoes  at  $3.75. 
*  {Concluded  on  page  50.) 


50 


RECORDING  TRANSACTIONS  IN  THE  CASH  BOOK. 


{Exercise  No.  20 — Continued  jrom  page  49.) 

March  12.  A.  R.  King,  Boston,  i  pr.  Ladies'  Bal.  at  $4.50. 

15.  W.  E.  Peters,  Clinton,  i  pr.  Men's  Vici  Autocrat  shoes,  $14.00. 

18.  W.  K.  Love,  207  Main  St.,  i  pr.  Men's  Vici  Kid  shoes,  $11.50. 

21.  A.  R.  King,  Boston,  2  prs.  Women's  Box  Calf  at  $4.00. 

26.  C.  A.  Sheppard,  Canton,  i  pr.  Men's  Cong.  Calf,  $9.00. 

30,  R.  L.  Watson,  207  Mason  St.,  6  prs.  Children's  Satin  Calf  at 


52.75- 


When  the  above  transactions  have  been  recorded  in  the  sales  journal  as  in- 
structed, and  the  sales  journal  ruled  as  in  Illustration  No.  19.  open  an  account 
with  Sales  eight  lines  from  the  top  of  page  i  of  the  double  sheet  of  ledger  paper  used 
in  Exercise  No.  17;  open  an  account  wi-th  each  of  the  six  customers  on  page  3  of 
this  same  ledger  sheet,  allowing  equal  space  for  each  personal  account;  take  a 
Trial  Balance.    When  approved,  retain  the  ledger  sheet  for  use  in  Exercise  No.  23. 

§  42.  The  Cash  Record.  There  are  two  classes  of  cash  transactions:  those 
in  which  cash  is  received,  and  those  in  which  cash  is  paid.  These  transactions  may 
be  recorded  in  two  separate  journals,  the  receipts  in  a  cash  receipts  journal  and  the 
payments  in  a  cash  payments  journal,  or  they  may  be  recorded  in  a  cash  book 
which  is  a  combination  of  the  two  journals.  When  one  bookkeeper  records  all  the 
transactions  with  cash  received  and  paid,  it  is  better  to  use  the  cash  book;  when 
the  recording  of  cash  transactions  requires  more  than  one  bookkeeper,  it  is  better 
to  use  separate  cash  receipts  and  cash  payments  journals. 


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Illustration  No.  22,  Receipts  Side  of  Cash  Book. 


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EXPLANATION.  The  transactions  recorded  on  the  receipts  side  of  the  cash  book  in  the 
illustration  are  equivalent  to  a  journal  entry  in  which  the  Cash  account  is  debited  for  the  total, 
and  each  of  the  four  accounts  credited  for  the  amount  written  on  the  same  line  with  it.  The  ruling 
separates  the  cash  receipts  for  two  different  months;  the  balance  at  the  beginning  of  the  month 
is  carried  down  below  the  ruling  because  it  will  be  needed  in  subsequent  proving  of  cash. 

§  43.  The  Cash  Book  is  a  book  of  original  entry  in  which  all  receipts  and 
payments  of  cash  are  recorded  and  no  other  transactions  are  recorded  in  it.  Receipts 
and  payments  are  usually  recorded  on  separate  pages  opposite  each  other,  receipts 
on  the  left  and  payments  on  the  right.  The  complete  record  of  a  transaction  in 
which  cash  is  received  or  paid  consists  of  the  date,  the  name  of  the  account  affected, 
explanation,  and  the  amount  received  or  paid.  The  ruling  in  the  cash  book  should 
be  so  arranged  that  all  this  information  can  be  recorded  on  one  line.     When  ar- 


RECORDING  TRANSACTIONS  IN  THE  CASH  BOOK. 


51 


ranged  in  this  manner,  each  account  affected  by  a  cash  receipt  can  be  credited 
for  the  amount  and  the  Cash  account  debited  for  the  total  at  the  end  of  the  month; 
each  account  affected  by  a  cash  payment  can  be  debited  for  the  amount  and  the 
Cash  account  credited  for  the  total  at  the  end  of  the  month.  One  form  of  the 
cash  book  is  shown  in  Illustrations  Nos.  22  and  23;  other  forms  will  be  illustrated 
and  explained  later. 

When  a  cash  sale  is  recorded  in  the  cash  book  only,  the  Sales  account  is  credited;  if  recorded 
in  the  sales  journal  and  cash  book,  the  customer  whose  account  is  debited  by  the  sales  journal  entry 
is  credited  in  the  cash  hook  entry  When  a  cash  purchase  is  recorded  in  the  cash  bo(jk  only,  the 
Purchases  account  is  debited;  if  recorded  in  the  purchases  journal  and  cash  book,  the  creditor  whose 
account  is  credited  by  the  purchases  journal  entry  is  debited  in  the  cash  book  entry. 

The  following  receipts  and  payments  of  cash  made  during  the  month  of  Jan- 
uary by  E.  B.  Ta>'lor,  a  retail  grocer,  are  shown  recorded  in  the  cash  book  in  Illus- 
trations Nos.  22  and  23: 


Jan. 


I.  E.  B.  Taylor  invested  $1,000.00  in  the  retail  grocery  business. 

4.  Paid  $20.00,  city  and  state  license  for  one  year. 

10.  Paid  J.  F.  Sherwood  $192.00  for  a  cash  purchase  of  merchandise. 

12.  Received  $30.50  for  sundry  cash  sales. 

13.  Paid  E.  C.  Cline  $77.30  in  full  of  account. 

20.  Received  $10.00  from  A.  R.  Manley  to  apply  on  account. 

27.  Received  $30  50  from  the  Gibson  Hotel  to  apply  on  account. 

30.  Received  $41.85  for  sundry  cash  sales. 


V 

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Illustration  No.  23,  Payments  Side  of  Cash  Book. 

EXPLANATION.  The  transactions  recorded  on  this  side  of  the  cash  book  are  equivalent 
to  a  journal  entry  in  which  three  accounts  are  debited,  each  for  the  amount  written  on  the  same 
line  with  it,  and  the  Cash  account  credited  for  the  total.  The  balance  is  entered  in  red  ink  because 
it  is  customary  to  use  red  ink  when  an  amount  is  entered  in  a  book  of  account  or  a  ledger  account  in 
order  to  make  the  two  sides  equal.    The  ruling  separates  the  cash  payments  for  two  different  months. 


§  44.  Proving  Cash.  The  difference  between  the  two  sides  of  the  cash 
book  should  at  all  times  equal  the  amount  of  cash  belonging  to  the  business;  the 
proof  is  effected  by  counting  the  cash  and  comparing  it  with  the  balance  shown 
by  the  cash  book.  Cash  should  be  pro\x'd  before  posting.  After  the  cabh  is  proved 
at  the  end  of  the  month,  the  cash  book  is  ruled;  Illustrations  Nos.  22  and  23  show 
the  method  of  footing  and  ruling  the  cash  book  at  the  end  of  the  month. 


52 


RECORDING  TRANSACTIONS  IN  THE  CASH  BOOK. 


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Illustration  No.  24,  Ledger  Resulting  from  Posting  Illustrations  Nos.  22  and  23. 


EXPLANATION.  This  illustration  is  given  to  show  that  the  ledger  is  in  balance  when  all 
the  transactions  recorded  in  the  cash  book  have  been  posted,  and  not  to  show  the  true  meaning  of 
the  accounts.  Accounts  resulting  from  the  posting  of  transactions  recorded  in  the  cash  book  only 
will  not  show  their  true  meaning  because  of  the  connection  between  the  record  in  the  cash  book 
and  that  in  the  purchases  and  sales  journals.  If  desired,  the  posting  from  the  receipts  side,  the  pay- 
ments side,  and  both  sides  of  the  cash  book  may  each  be  proved  by  a  separate  Trial  Balance. 


RECORDING  TRANSACTIONS  IN  THE  CASH  BOOK.  53 

§  45.  Posting  from  the  Cash  Book.  The  accounts  affected  by  each 
transaction  recorded  on  the  receipts  side  of  the  cash  book  are  Cash  debited  and 
some  account  credited;  for  this  reason  each  amount  written  on  the  line  with  the 
name  of  the  account  is  posted  to  the  credit  of  the  account,  and  Cash  is  debited 
with  the  total  at  the  end  of  the  month.  The  accounts  affected  by  each  transaction 
recorded  on  the  payments  side  of  the  cash  book  are  some  account  debited  and 
Cash  credited;  for  this  reason  each  amount  written  on  the  line  with  the  name  of 
the  account  is  posted  to  the  debit  of  the  account,  and  Cash  is  credited  with  the 
total  at  the  end  of  the  month.  The  posting  to  the  accounts  debited  and  credited 
is  daily,  and  to  the  Cash  account  monthly.  The  date,  the  letter  "C"  and  the  page 
of  the  cash  book  are  entered  in  the  ledger;  the  letter  "C"  indicates  the  title  of 
the  book  of  original  entry.  The  page  of  the  ledger  is  written  in  the  folio  column 
of  the  cash  book  to  indicate  where  the  entry  has  been  posted. 

The  posting  of  the  transactions  recorded  in  the  cash  book,  Illustrations  Nos. 
22  and  23,  is  shown  in  Illustration  No.  24. 

Some  bookkeepers  advise  a  Cash  account  in  the  ledger,  while  others  accept  the  record  in  the 
cash  book  as  the  Cash  account.  The  Cash  account  in  the  ledger  will  show  the  total  receipts  and 
total  payments  of  cash  for  a  period  longer  than  a  month,  while  the  record  in  the  cash  book  shows 
the  total  receipts  and  total  payments  for  each  month  only.  If  it  is  desired  to  know  the  cash  receipts 
and  cash  payments  for  the  first  six  months  of  a  given  year,  this  information  can  be  obtained  from 
the  total  debits  and  total  credits  to  the  Cash  account  in  the  ledger;  if  the  cash  book  is  the  only 
record  of  cash,  it  will  be  necessary  to  add  the  totals  for  each  of  the  six  months  in  order  to  ascertain 
the  desired  information. 

Exercise  No.  21,  Recording  Transactions  in  the  Cash  Book. 

Record  in  the  cash  book  (the  two  inside  pages  of  a  double  sheet  of  journal 
paper*  ruled  similar  to  Illustrations  Nos.  22  and  23),  receipts  on  the  left  and  pay- 
ments on  the  right,  the  following  cash  transactions  performed  during  the  month  of 
February : 

Feb.     I.  Student  invested  $1,276.80  in  the  retail  grocery  business. 

2.  Received  $150.00  from  E.  H.  White  to  apply  on  account. 

3.  Paid  office  rent  for  the  month  of  February,  $40.00. 

4.  Received  $80.00  for  cash  sales. 

Paid  H.  R.  Swanson  $60.00  to  apply  on  account. 
6.     Received  $120.00  for  cash  sales. 

8.  Paid  A.  B.  Hill  $90.50  to  apply  on  account.. 

9.  Received  $90.00  from  J.  K.  Lachman  in  payment  for  merchandise  sold 

him  on  the  4th. 

10.  Paid  drayage  on  merchandise  purchased,  $22.50. 

11.  Paid  J.  G.  Pipkin  $124.00  to  apply  on  account. 
14.     Received  $69.75  ^or  cash  sales. 

16.     Received  $170.00  from  P.  B.  S.  Peters  in  payment  for  merchandise  sold 

him  on  the  loth. 
18.     Paid  $45.00  for  office  supplies. 
20.     Paid  J.  T.  Ludlow  $146.00  to  apply  on  account. 

22.  Purchased  merchandise  for  cash  from  H.  P.  King,  $128.00. 

23.  Received  $47.85  for  cash  sales. 

24.  Received  $210.00  from  H.  M.  Lovert  to  apply  on  account. 

25.  Paid  salesman's  expenses,  $76.00. 
Received  $52.50  for  cash  sales. 

{Concluded  on  page  54.) 

*If  double  journal  paper  with  from  thirty  to  forty  lines  on  each  page  is  not  available, 
cash  receipts  should  be  recorded  on  one  sheet  of  paper  and  payments  on  another,  as  the  proper 
ruling  of  the  cash  book  cannot  be  shown  when  receipts  are  entered  on  one  side  and  payments  on 
the  other  side  of  the  same  sheet. 


54  RECORDING  TRANSACTIONS  IN  THE  CASH  BOOK. 

{Exercise  No.  21 — Continued  from  page  jj.) 

Feb.  27,     Paid  $32.80  for  freight  on  merchandise  purchased. 
Paid  clerk  hire,  $40.00. 

28.  Paid  for  advertising,  $22.50. 

Cash  balance,  $1,439.60. 

When  the  above  transactions  have  been  recorded  in  the  cash  book  as  instructed, 
prove  cash  and  rule  the  cash  book  as  in  Illustrations  Nos.  22  and  23.  Open  ac- 
counts on  a  sheet  of  ledger  paper  with  Student,  Capital  (5),  Cash  (5),  Purchases  (6), 
Sales  (8),  Expense  (8),  E.  H.  White  (4),  J.  K.  Lachman  (4),  P.  B.  S.  Peters  (4),  H.  M. 
Lovert  (4),  H.  R.  Swanson  (4),  A.  B.  HilJ  (4),  J.  G.  Pipkin  (4),  J.  T.  Ludlow_(4), 
allowing  for  each  account  the  number  of  lines  indicated.  Post  the  transactions, 
and  prove  the  equality  of  the  debits  and  credits  by  a  Trial  Balance  of  balances. 

Exercise  No.  22,  Recording  Transactions  in  the  Cash  Book. 

Record  in  the  cash  book,  receipts  on  the  left  and  payments  on  the  right,  the 
following  cash  transactions  performed  during  the  month  of  January  by  H.  H. 
Goodm  n,  a  retail  grocer: 

Jan.     I.     H.  H.  Goodman  invested  $2,000.00  in  the  retail  grocery  business. 

4.  Paid  $20.00  for  city  license. 

5.  Paid  City  Milling  Co.  $192.00  for  a  cash  purchase. 

6.  Received  $30.00  for  sundry  cash  sales. 
Paid  Brown  &  Co.  $77.30  in  full  of  account. 

9.     Received  $10.00  from  A.  R.  Jennings  to  apply  on  account. 

12.  Received  $30.00  from  Central  Hotel  to  apply  on  account, 

13,  Received  $40.00  for  sundry  cash  sales. 

Paid  Knox  Bros.  $100.00  to  apply  on  account. 
18.     Received  $35.00  from  M.  A.  Johnson  to  apply  on  account. 
20.     Paid  Knox  Bros.  S34.95  in  full  of  account. 

Received  $50.00  for  sundry  cash  sales. 
24.     Received  $15.00  from  Central  Hotel  to  apply  on  account. 

Paid  Hazen  &  Lockhart  $125.00  to  apply  on  account. 

26.  Received  $15.10  from  A.  R.  Jennings  to  apply  on  account. 

27.  Received  $42.50  for  sundry  cash  sales. 

29.  Received  $50.00  from  C.  L.  Loyd  to  apply  on  account. 

30.  Paid  Brown  &  Co.  $150.00  to  apply  on  account. 

31.  Paid  bookkeeper's  salary,  $35.00;   rent,  $25.00. 

Cash  balance,  $1,558.35. 

When  the  above  transactions  have  been  recorded  in  the  cash  book  as  instructed, 
prove  cash  and  rule  the  cash  book;  then  proceed  as  follows: 

1.  Open  accounts  on  ledger  paper  with  H.  H.  Goodm  n.  Capital  (4),  Cash 
(4),  Purchases  (4),  Sales  (6),  Expense  (4),  A.  R.  Jennings  (4),  Central  Hotel  (4), 
M.  A.  Johnson  (4),  C.  L.  Loyd  (4),  Brown  &  Co.  (4),  Knox  Bros.  (4),  Hazen  & 
Lockhart  (4),  allowing  for  each  account  the  space  indicated;  post  the  transactions, 
and  prove  the  equality  of  the  debits  and  credits  by  a  Trial  Balance  of  balances, 

2.  After  the  instructor  has  approved  the  work  required  in  the  first  para- 
graph, post  to  a  sheet  of  ledger  paper  the  transactions  in  the  purchases  journal  for 
Exercise  No.  16  and  the  sales  journal  for  Exercise  No.  19,  which  you  were  instruct- 
ed to  retain,  and  the  cash  book  in  this  exercise.  Arrange  the  accounts  as  follows: 
Cash  (6),  customers  (each  4  lines),  creditors  (each  4  lines),  H.  H.  Goodm  n.  Capital 
(5),  Sales  (7),  Purchases  (4),  Expense  (4),  allowing  for  each  the  number  of  lines 
indicated;    take  a  Trial  Balance  of  balances  from  this  ledger, 

{Concluded  on  page  55-) 


THE  GENERAL  JOURNAL.  55 

{Exercise  No.  22 — Continued  j row,  page  54.) 
The  purpose  of  the  second  division  of  this  exercise  is  to  show  that  the  ledger  is 

in  balance  when  all  the  transactions  from  all  the  special  journals  have  been  posted, 

the  same  as  it  is  when  all  the  transactions  from  each  special  journal  have  been 

posted. 

Present  the  purchases  journal,  sales  journal,  cash  book,  ledger  resulting  from 

posting  the  transactions  from  the  three  books,  and  Trial  Balances  to  the  instructor 

for  approval. 

Exercise  No.  23,  Recording  Transactions  in  the  Cash  Book. 

Record  in  the  cash  book  the  following  cash  transactions  performed  during  the 
month  of  March  by  C.  U.  Steele,  a  retail  shoe  dealer: 
March     i.     C.  U.  Steele  invested  $2,500.00  in  the  retail  shoe  business. 

2.     Bought  from  M.  B.  Arnstine,  for  cash,  stock  of  shoes,  $1,691.42. 
•    3.     Paid  telephone  service  in  advance  for  three  months,  $20.00. 
Received  $69.85  for  cash  sales. 

5.  Paid  clerk's  salary,  $25.00. 

6.  Received  $10.50  from  R.  L.  Watson  in  full  of  account. 

8.  Paid  Bay  State  Shoe  Co.  $496.81  in  full  of  account. 

9.  Received  $275.40  for  cash  sales. 

12.  Paid  clerk's  salary,  $25.00. 

13.  Paid  $75.00,  premium  on  insurance  policy. 

15.  Paid  Haynes,  Henson  &  Co.  $387.65  in  full  of  account. 

16.  Received  $12.00  from  C.  A.  Sheppard  in  full  of  account. 

18.  Paid  $8.25  for  stamps  and  stationery. 

19.  Paid  clerk's  salary,  $25.00. 

22.     Received  $72.50  from  J.  C.  Wilson  &  Co.  in  full  of  account. 
24.     Received  $11.50  from  W.  K.  Love  in  full  of  account. 
26.     Received  $581.92  for  cash  sales. 

Paid  clerk's  salary,  $25.00. 
29.     Received  $4.50  from  A.  R.  King  for  merchandise  sold  him  on  the  12th. 
31,     Paid  rent,  $50.00. 

Paid  ClineShoe  Co.  $168.42  for  merchandise  purchased  on  the  6th. 
Received  $361.92  for  cash  sales. 
Cash  balance,  $902.54. 
When  the  above  transactions  have  been  recorded  in  the  cash  book  as  instructed, 
prove  cash  and  rule  the  cash  book.    Open  an  account  on  page  i  of  the  double  sheet 
of  ledger  paper  used  in  Exercises  Nos.  17  and  20  with  C.  U.  Steele,  Capital,  eleven 
lines  below  the  heading  of  the  Sales  account,  an  account  with  Expense  seven  lines 
below  the  heading  of  the  account  with  C.  U.  S  eelc,  Capital,  and  an  account  with 
Cash  fourteen  lines  below  the  heading  of  the  Expense  account.     Post  the  entries 
in  the  cash  book  to  the  accounts  on  pages  i,  2  and  3  of  the  ledger  sheet,  and  take  a 
Trial  Balance  of  balances. 

Retain  the  ledger  and  Trial  Balance  for  use  in  Exercise  No.  37. 

§  46.  The  General  Journal  is  a  book  of  original  entry  in  which  all  transac- 
tions are  recorded  except  those  recorded  in  special  journals.  The  general  journal 
is  the  same  as  the  journal  explained  in  §  22,  and  the  ruling  is  the  same  as  the  various 
illustrations  of  the  journal  given  in  preceding  chapters.  When  purchases  are  recorded 
in  the  purchases  journal,  sales  in  the  sales  journal,  and  cash  receipts  and  payments 
in  the  cash  book,  all  other  transactions  are  recorded  in  the  general  journal.  These 
transactions  may  be  classified  into  four  groups:  (i)  opening  entries;  (2)  current 
entries;    (3)  correcting  entries;    (4)  adjusting  and  closing  entries. 

^  I.  Opening  Entries  are  those  necessary  to  record  assets  other  than  cash 
invested  by  the  owner  at  the  beginning  of  the  business.     If  the  business  is  owned 


56       RECORDING  TRANSACTIONS  IN  THE  GENERAL  JOURNAL. 

by  one  person  and  his  investment  is  cash,  the  opening  entry  will  be  made  in  the 
cash  book.  If  assets  other  than  cash  are  invested,  the  accounts  which  are  to  show 
the  value  of  the  assets  will  be  debited,  and  the  owner's  Capital  account  credited 
for  the  total  of  the  assets  in  the  opening  entry  in  the  journal.  If  the  owner  wishes 
to  have  the  business  assume  liabilities,  two  entries  are  necessary  to  open  the  books, 
one  to  record  the  assets,  and  the  other  to  record  the  liabilities;  the  owner's  Capital 
account  is  debited  for  the  total  liabilities,  and  the  accounts  which  are  to  show  the 
liabilities,  credited. 

ILLUSTRATION.     January   i,  S.  J.  Shook  began  the  retail  shoe  business.     He  invested 
cash    $500.00,    merchandise    $425.65,   and   an  January  i   102 

account    due    him    from    W.    H.    Barton    for  -^    '    ^ 

$221.75.  He  owes  the  Ritter  Shoe  Co.  $150.00 
and  the  Haynes  Shoe  Co.  $75.85.  The  cash 
invested  will  be  recorded  in  the  cash  book 
as  in  the  first  entry  in  Illustration  No.  22; 
the  other  assets  and  the  liabilities  will  be  record- 
ed in  the  general  journal  as  in  the  illustration 


425\65\\ 

22l\75\ 


647  40 

150 

75  S5 


Purchases 

!  W.  H.  Barton 
I       S.  J.  Shook,  Capital 
j  S.  J.  Shook,  Capital 
Ritter  Shoe  Co. 

at  the'ridit.'        ^  "" "        "  '  Haynes  Shoe  Co. 

If  desired,  the  entry  for  the  cash  invested  may  be  made  in  connection  with  the  entry  in  the 
general  journal  for  the  other  assets  When  this  plan  is  followed,  cash  and  each  asset  is  debited  and 
the  proprietor  credited  in  the  same  form  as  in  the  illustration.  The  proprietor  is  also  credited  for  the 
cash  in  the  cash  book  in  the  same  manner  as  though  the  entry  for  the  cash  had  not  been  made  in 
the  general  journal.  A  check  mark  is  placed  in  the  L.  F.  column  at  the  left  of  Cash  in  the  general 
journal  and  at  the  left  of  the  proprietor's  name  in  the  cash  book  to  avoid  double  posting. 

^  2.  Current  Entries  are  those  necessary  to  record  transactions  in  the  reg- 
ular operations  of  the  business.  When  the  nature  of  these  transactions  is  such 
that  they  cannot  be  recorded  in  one  of  the  special  journals,  it  is  necessary  to  record 
them  in  the  general  journal.  Current  entries  include  those  for  transactions  in 
which  merchandise  is  returned  to  a  creditor,  a  customer  returns  merchandise, 
assets  other  than  cash  are  accepted  from  customers  in  payment  of  their  obligations, 
and  assets  other  than  cash  are  given  to  a  creditor  in  payment  of  an  obligation 
owed  him. 

ILLUSTRATION.  May  12,  George  A.  Douglas  purchased  from  the  Potter  Shoe  Co.  two 
pairs  shoes  at  $8.50.  with  the  privilege  of  returning  one  pair  within  five  days.  This  transaction 
was  recorded  in  the  sales  journal,  his  account 

being  debited  with  $17.00.    May  15  he  returned  May  is,  192 

one  pair  and  received  credit  for  $8.50  as  per  ^=^  7.  ,     'y     =F= 

agreement.     The  entry  required  in  the  gen-  |        Sales  8  $0 

eral   journal   is   shown   in   the   illustration   at  1     I       George  A.  Douglas  8^0 

the  right.  j 

Tl  3.  Correcting  Entries  are  those  made  necessary  because  of  errors  in  record- 
ing transactions.  These  errors  may  occur  in  the  calculations  necessary  to  ascertain 
the  amount  of  a  sale,  a  purchase,  merchandise  returned  by  a  customer,  merchan- 
dise returned  to  a  creditor,  or  they  may  be  the  result  of  incorrect  posting. 

ILLUSTRATION.  April  16,  C.  A.  Moore  purchased  from  Dawes  Bros.,  retail  tire  dealers 
two  32  X  33^  Fisk  cord  tires  at  $37.75  each.  The  transaction  was  recorded  in  the  sales  journal 
by  the  bookkeeper  for  Dawes  Bros.,  but  through  an  error,  the  amount  was  entered  as  $85.50  instead 
of  $75.50.  May  I,  Dawes  Bros,  received  $75.50  from  Mr.  Moore  in  full  payment  for  the  two  tires. 
When  the  bookkeeper  for  Dawes  Bros,  posted 

the  amount  to  Mr.  Moore's  account,  there  was  May  i 

a  balance   of   $10.00,   due  to  the  error  which 


Mr.  Moore  had  reported.    The  only  means  of  \       Sales 

correcting  this  error  was  through  an  entry  in  \      C.  A.  Moore 

the  general  journal  similar  to  that  in  the  IIlus-  | 

tration  at  the  right.  1     : 

%  4.  Adjusting  and  Closing  Entries  are  those  required  at  the  end  of  a  business 
year.    These  are  explained  and  illustrated  in  Chapter  VIII. 

^  5.  Posting  from  the  General  Journal.  Each  amount  entered  in  the  debit 
column  is  posted  to  the  debit  side  of  the  account  written  on  the  same  line  with  it. 
Each  amount  entered  in  the  credit  column  is  posted  to  the  credit  side  of  the  account 
written  on  the  same  line  with  it.    The  process  is  the  same  as  that  given  in  §  23. 


EXERCISE  IN  RECORDING  TRANSACTIONS.  57 

Exercise  No.  24,  Purchases  Journal,  Sales  Journal,  General  Journal,  and 

Cash  Book. 

Record  in  the  purchases,  sales  (Illustration  No.  19),  and  general  journals  and 
the  cash  book,  the  following  transactions  performed  during  the  month  of  February 
by  Donald  D.  Sells,  a  retail  hardware  merchant: 

Feb.     I.     Donald  D.  Sells  invested  $3,000.00  in  the  hardware  business. 

2.  Bought  from  Moore  &  Moore,  City,  on  account,  merchandise,  $187.65. 
Enter  in  the  purchases  journal  as  Purchase  No.  i  and  number  succeeding  entries  in  this 

journal  in  regular  order. 

3.  Sold  J.  C.  Mason,  City,  on  account,  four  kegs  nails  at  $4.50  each. 

4.  Paid  Davis  Bros.,  City,  $281.36  for  a  cash  purchase  of  merchandise. 

Enter  on  the  payments  side  of  the  cash  book  as  a  debit  to  the  Purchases  account. 

5.  Paid  $25.00  telephone  rent  for  three  months  in  advance. 

6.  Bought  from  the  Pickering  Hardware  Co.,  Danville,  on  fifteen  days' 

time,  merchandise,  $321.97. 
Paid  Moore  &  Moore  $100.00  on  account. 

8.  Received  $116.50  for  cash  sales. 

9.  Sold  Walter  Love,   Riverside,   on  account,  one  saw,   $5.00;    one  corn 

sheller,  $37.25. 

10.  Bought  from  Johnson  Bros.,  Dayton,  on  fifteen  days'  time,  merchandise 

$261.85. 
Received  $18.00  from  J.  C.  Mason  in  full  of  account. 

11.  Paid  Moore  &  Moore  $87.65  in  full  of  account. 

12.  Sold  J.  C.  Miller,  City,  on  account,  100  lbs.  lead  at  8c;   4  doz,  picks  at 

$14.50  per  doz. 

13.  Received  $106.95  for  cash  sales. 

Gave  Walter  Love  credit  for  $5,00,  value  of  the  saw  sold  him  on  the  9th 
and  returned  by  him  per  agreement. 

15.  Received  $20.00  from  Walter  Love  to  apply  on  account. 

16.  Paid  clerk's  salary,  $30.00. 

17.  Bought  from  Donaldson  Bros.,  Mooresville,  on  account,  merchandise, 

$321.85. 

18.  Sold  Central  Construction  Co.,  Arlington,  on  account,  3  doz.  shovels 

at  $9.00  per  doz. ;  5  doz.  picks  at  $14.00  per  doz. ;  6  scrapers  at  $38.50 
each. 

19.  Paid  Pickering  Hardware  Co.  $321.97  in  full  of  account. 

20.  Received  $15.60  cash  from  Davis  Bros,  for  three  kegs  of  nails  purchased 

from  them  on  the  4th  and  returned  by  us  per  agreement. 
Paid  Johnson  Bros.  $150.00  on  account. 
22.     Received  $125.25  for  cash  sales. 

24.  Donaldson  Bros,  have  allowed  us  credit  for  $32.60,  cutlery  purchased 

from  them  on  the  17th  and  returned  by  us  per  agreement. 
Sold  Walter  Love,  Riverside,  on  account,  i  Studebaker  wagon,  $125.00. 
Paid  Johnson  Bros.  $100.00  to  apply  on  account. 

25.  Purchased  from  the  Pickering  Hardware  Co.,  Danville,  on  fifteen  days' 

time,  merchandise,  $127.50. 

26.  Received  $17.25  from  Walter  Love  in  full  for  the  corn  sheller  sold  him 

on  the  9th. 

27.  Received  $121.85  for  cash  sales. 

28.  Paid  rent,  $50.00;   clerk's  salary,  $30.00. 

When  the  above  transactions  have  been  recorded  in  the  four  books  of  original 
entry,  prove  cash  (balance,  $2,365.42)  and  rule  the  cash  book  as  in  Illustrations  Nos. 
22  and  23.  Open  accounts  on  a  sheet  of  ledger  paper  with  Cash  (8),  J.  C.  Mason 
(5),  Walter  Love  (7),  J.  C.  Miller  (5),  Central  Construction  Co,   (5),  Moore  & 


58  EXERCISE  IN  RECORDING  TRANSACTIONS. 

Moore  (6),  Pickering  Hardware  Co.  (6),  Johnson  Bros.  (6),  Donaldson  Bros.  (5), 
Donald  D.  Sells,  Capital  (8),  Sales  (10),  Purchases  (10),  Expense  (8),  allowing  for 
each  account  the  number  of  lines  indicated;  post  from  the  books  of  original  entry, 
and  take  a  Trial  Balance  of  totals. 

Retain  the  ledger  and  Trial  Balance  for  use  in  Exercise  No.  38. 

Exercise  No.  25,  Purchases  Journal,  Sales  Journal,  General  Journal  and 

Cash  Book. 

Record  in  the  purchases,  sales  (Illustration  No.  20),  and  general  journals  and 
the  cash  book,  the  following  transactions  performed  during  the  month  of  October 
by  H.  A.  Popp,  a  retail  coal  dealer: 

Oct.     I.     H.  A.  Popp  invested  $1,000.00  in  the  retail  coal  business. 

3.  Bought  from  the  Central  Coal  Co.,  Jerseyville,  on  ten  days'  time,  $250.00. 

Enter  in  the  purchases  journal  as  Purchase  No.  i  and  number  succeeding  entries  in  this 
jnurnal  in  regular  order. 

Sold  J.  C.  Miller,  City,  on  account,  coal  per  Sale  No.  i,  $52.50. 

4.  Bought  from  Davis  Coal  Co.,  Covington,  on  account,  $175.50. 

5.  Paid  $10.00  for  one  month's  telephone  service 

6.  Bought  from  Jellico  Coal  Co.,  Jellico,  on  fifteen  days'  time,  $362.75. 

8.  Paid  the  Central  Coal  Co.  $100.00  on  account. 
Received  $62.80  for  cash  sales  of  coal. 

9.  Sold  M.  B.  Wallace,  City,  on  account,  coal  per  Sale  No.  2,  $30.50. 

10.  Paid  the  Murray  Drayage  Co.  $104.90,  freight  and  drayage  bills  on  coal 

purchased  and  delivered. 
Received  $151.05  for  cash  sales  of  coal. 

11.  Sold  the  Central  Hotel,  City,  on  account,  coal  per  Sale  No.  3,  $242.50. 

12.  Paid  the  Central  Coal  Co.  $150.00  in  full  of  account. 

13.  Sold  J.  C.  Miller,  City,  on  account,  coal  per  Sale  No.  4,  $16.50. 

15.  Paid  clerk's  salary  for  the  first  half  of  the  month,  $40.00. 
Received  $122.00  for  cash  sales  of  coal. 

16.  Received  $20.00  from  M.  B.  Wallace  on  account. 

18.     Paid  the  Donaldson  Coal  Co.  $400.00  for  coal  delivered  today. 
20.     Paid  the  Jellico  Coal  Co.  $150.00  on  account. 

The  Jellico  Coal  Co.  has  allowed  us  credit  for  $10.00  overcharge  on  coal 
purchased  on  the  6th. 

22.  Received  $10.50  from  M.  B.  Wallace  in  full  of  account. 

23.  Sold  the  Central  Hotel,  City,  on  account,  coal  per  Sale  No.  5,  $27.50. 

24.  Bought  from  the  Davis  Coal  Co.,  Covington,  on  account,  $209.38. 

25.  Received  $135.65  for  cash  sales  of  coal. 

26.  Allowed  the  Central  Hotel  credit  for  $2.50,  error  in  weight  of  coal  sold 

them  on  the  23d. 
Sold  M.  B.  Wallace,  City,  on  account,  coal  per  Sale  No.  6,  $10.00. 

27.  Received  $200.00  from  the  Central  Hotel  to  apply  on  account. 

29.  Sold  J.  C.  Miller,  City,  on  account,  coal  per  Sale  No.  7,  $40.00. 

30.  Received  $192.80  for  cash  sales  of  coal. 

31.  Paid  rent,  $65.00;   clerk's  salary  for  the  latter  half  of  the  month,  $40. 00. 
When  the  above  transactions  have  been  recorded  in  the  four  books  of  original 

entry,  prove  cash  (balance,  $834.90)  and  rule  the  cash  book.  Open  accounts  on  a 
sheet  of  ledger  paper  with  Cash  (8),  J.  C.  Miller  (7),  M.  B.  Wallace  (7),  Central 
Hotel  (6),  Central  Coal  Co.  (6).  Davis  Coal  Co.  (6),  Jellico  Coal  Co.  (6),  H.  A.  Popp, 
Capita]  (8),  Sales  (12),  Purchases  (10),  Expense  (8),  allowing  for  each  account  the 
number  of  lines  indicated;  post  from  the  books  of  original  entry,  and  take  a  Trial 
Balance  of  balances. 

Retain  the  ledger  and  Trial  Balance  for  use  in  Exercise  No.  39. 


QUESTIONS  ON  RECORDING  TRANSACTIONS.  59 

Summary  of  Chapters  II,  III,  IV  and  V.  Transactions  may  be  recorded 
direct  in  the  ledger,  in  one  journal  and  posted  to  the  ledger,  or  in  special  journals 
and  posted  to  the  ledger;  the  final  results  are  the  same  in  etch  case.  The  Trial 
Balance,  if  in  balance,  proves  that  the  total  of  the  debit  amounts  recorded  in  the 
ledger  equals  the  total  of  the  credit  amounts  recorded  in  the  ledger;  also  that  the 
addition  of  those  accounts  which  have  more  than  one  amount  recorded  on  the 
debit  or  credit  side  is  correct.  The  Trial  Balance  may  be  made  by  using  the  total 
debits  and  total  credits  of  each  account,  or  the  balance  of  each  account;  the  fmal 
results  are  the  same  with  either  method. 

Each  account  is  debited  and  credited  through  the  recording  of  business 
transactions.  All  money  received  is  recorded  on  the  debit  side  of  the  Cash  account, 
and  all  money  paid  on  the  credit  side.  The  value  of  merchandise  purchased  is 
recorded  on  the  debit  side  of  the  Purchases  account,  and  the  value  of  merchandise 
returned  to  a  creditor  on  the  credit  side  of  this  account.  The  value  of  merchandise 
sold  is  recorded  on  the  credit  side  of  the  Sales  account  and  the  value  of  merchandise 
which  customers  return  is  recorded  on  the  debit  side  of  this  account  When  a  cus- 
tomer bux'S  merchandise  and  does  not  pay  for  it  at  the  time  it  is  purchased,  his  ac- 
count is  debited  for  the  amount;  when  he  pays  this  obligation  to  the  business,  his 
account  is  credited.  When  a  business  buys  merchandise  and  does  not  pay  for  it 
at  the  time  of  purchase,  the  account  with  the  creditor  is  credited:  when  the  busi- 
ness pays  this  obligation,  the  account  with  the  creditor  is  debited.  When  a  cus- 
tomer has  paid  all  he  owes,  his  account  will  be  in  balance:  when  the  business  has 
paid  .1  creditor  all  it  owes  him,  his  account  will  be  in  balance.  The  expenses  of 
the  bu=^iness  are  recorded  on  the  debit  side  of  the  Expense  account.  The  owner 
of  the  business  is  credited  in  his  Capital  account  with  the  investment,  and  debited 
with  any  amount  which  he  withdraws  from  the  investment. 

The  purpose  of  special  journals  is  to  save  time  in  recording  transactions  and 
posting  to  the  accounts  in  the  ledger.  When  a  number  of  transactions  affect  the 
same  account,  the  amounts  debited  or  credited  to  this  account  may  be  posted  in 
one  amount  if  all  these  transactions  are  in  one  journal.  The  purchases  journal 
contains  a  record  of  all  transactions  in  which  merchandise  is  purchased  on  account; 
the  sales  journal  contains  a  record  of  all  transactions  in  which  merchandise  is  sold  on 
account;  the  cash  book  contains  a  record  of  all  transactions  in  which  cash  is  re- 
ceived and  paid. 


QUESTIONS 

1.  Describe  in  detail  the  labor  saved  in  recording  one  hundred  sales  of  merchan- 

dise on  account  in  the  sales  journal  instead  of  the  journal. 

2.  Describe  in  detail  the  labor  saved  in  recording  fifty  purchasss  of  merchandise 

on  account  in  the  purchases  journal  instead  of  the  journal. 

3.  Can  you  suggest  some  method  of  obtaining  a  copy  of  a  sale  made  to  a  customer 

on  account  without  writing  twice  the  description  of  the  articles  sold.'* 

4.  Describe  in  detail  the  labor  saved  in  recording  one  hundred  sales  in  the  sales 

journal,  Illustration  No.  20,  instead  of  the  sales  journal.  Illustration  No.  19, 
provided  you  have  suggested  a  means  of  retaining  a  copy  of  the  items  sold 
without  writing  them  twice. 

5.  When  is  it  advisable  to  record  the  transactions  in  a  cash  receipts  journal  and 

a  cash  payments  journal? 

6.  Is  it  necessary  to  enter  receipts  on  the  left  and  payments  on  the  right  pages 

of  a  cash  book? 


6o  QUESTIONS  ON  RECORDING  TRANSACTIONS. 

7.  Describe  in  detail  the  method  of  proving  cash. 

8.  Would  you  consider  it  advisable  to  prove  cash  before  posting?    Give  reason 

for  your  answer. 

9.  Describe  in  detail  the  method  of  recording  a  purchase  of  merchandise  for 

cash  in  the  cash  book  and  the  purchases  journal. 

10.  Describe  in  detail  the  method  of  entering  a  cash  purchase  in  the  cash  book 

onl}^ 

11.  What  account  is  debited  and  credited  when  the  total  cash  receipts  and  cash 

payments  are  posted  at  the  end  of  the  month? 

12.  Name  the  account  debited  when  the  total  of  the  purchases  journal  is  posted 

at  the  end  of  the  month.     What  accounts  show  the  credits? 

13.  What  account  is  affected  when  the  total  of  the  sales  journal  is  posted  at  the 

end  of  the  month?    How? 

14.  Why  is  it  necessary  to  post  the  total  of  the  purchases  journal  and  the  total  ot 

the  sales  journal  at  the  end  of  the  month? 

15.  If  the  difference  between  the  two  sides  of  the  cash  book  is  greater  than  the 

cash  on  hand,  what  does  this  indicate? 

16.  If  the  difference  between  the  two  sides  of  the  cash  book  is  less  than  the  cash 

on  hand,  what  does  this  indicate? 

17.  If  you  were  keeping  books  for  a  retail  drug  store  and  the  difference  betw^een 

the  two  sides  of  the  cash  book  was  $10.00  more  than  the  cash  on  hand, 
what  entry  would  you  make  for  this  $10.00? 

18.  Have  you  seen  a  cash  register  in  operation?     If  so,  can  you  explain  its  con- 

nection with  the  entries  in  the  cash  book? 

19.  What  does  the  total  of  the  debit  side  of  the  cash  book  show? 

20.  What  does  the  total  of  the  credit  side  of  the  cash  book  show? 

21.  What  does  the  total  of  the  debit  side  of  the  Cash  account  in  the  ledger  show? 

22.  W'hat  does  the  total  of  the  credit  side  of  the  Cash  account  in  the  ledger  show? 

23.  Will  the  balance  of  cash  on  hand,  as  shown  by  the  cash  book  on  December  31, 

1 92 1,  show  the  same  amount  as  the  balance  of  the  Cash  account  in  the 
ledger  which  shows  a  record  of  cash  transactions  from  January  i,  1921  to 
December  31,  192 1? 

24.  What  additional  information,  which  is  not  shown  in  the  cash  book,  does  the 

owner  of  a  business  obtain  from  the  totals  of  the  two  sides  of  the  Cash 
account  in  the  ledger? 

25.  Name  some  of  the  transactions  which  the  bookkeeper  for  a  retail  jewelry 

business  might  enter  in  the  general  journal. 


Chapter  VI 


A  MODEL  SET 

The  Purpose  of  this  Model  Set  is  to  illustrate  the  recording  of  transactions 
for  a  period  of  two  months  and  to  serve  as  a  basis  for  completing  the  two  practice 
sets  which  are  separate  from  the  text.  The  references  in  connection  with  each  trans- 
action correlate  the  principles  discussed  in  the  preceding  chapters  with  the  recording 
of  the  transactions.  Illustrations  Nos.  25-38  show  the  method  of  recording  the 
transactions  for  September  and  October,  ruling  the  books  of  account,  posting, 
forwarding  accounts,  and  the  Trial  Balance  at  the  close  of  each  month.  The  stu- 
dent is  not  required  to  record  the  transactions  for  September  and  October,  but 
he  should  check  them  with  the  entries  in  the  illustrations  before  he  begins  the 
first  practice  set,  or  as  he  proceeds  with  it. 

MEMORANDA  OF  TRANSACTIONS  FOR  MODEL  SET 

September 

I.  W.  A.  Gordon  invested  $1,000.00  cash  and  $500.00  merchandise  in  the  re- 
tail grocery  business.  (Recorded  as  in  the  first  entry  in  Illustration  No.  29 
and  the  first  entry  in  Illustration  No.  28;  §§  43  and  46.  Two  accounts  are 
debited,  §§15  and  17,  and  one  account  credited,  §  34.) 


T 


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Illustration  No.  25,  Purchases  Journal  for  Model  Set 

61 


62 


A  MODEL  SET. 


2.  Bought  from  Brown  Bros.,  City,  on  account,  merchandise  per  Purchase  No, 

i>  $79  30-     (Recorded  as  in  the  first  entry,  Illustration  No.  25;    §  38.) 

3.  Bought  from  King  &  King,  City,  on  account,  merchandise,  per  Purchase  No. 

2,  $136.95.     (References  same  as  for  above  transaction.) 

4.  Paid  $25.00  cash  for  city  and  state  license.     (Debit  §  32;   credit  §  15.) 

5.  Sold  A   Y.  Jordan,  115  Main  St.,  City,  on  account,  merchandise  per  Sale  No. 

I,  $16.25.     (Recorded  as  in  the  first  entry,  Illustration  No.  26;    §  40.) 
Bought  from  Brown  Bros.,  City,  for  cash,  merchandise  per  Purchase  No.  3, 
$194.00.     (Recorded  as  in  the  third  entry  in  Illustration  No.  25  and  in  the 
second  entry  in  Illustration  No'  30.) 

6.  Received  $32.00  for  sundry  cash  sales  to  date.     (Debit  §  15;   credit  §  18.) 
Paid  Brown  Bros.  $79  30  in  full  for  merchandise  purchased  on  the  2d.     (Re- 
corded as  in  the  third  entry.  Illustration  No.  30;    §  28.) 

8.     Sold  People's  Hotel,  165  Willis  St.,  City,  on  account,  merchandise  per  Sale 
No.  2,  $59.35.     (Debit  §  27;    credit  §  18.     Illustration  No.  26.) 


7  /f 


Account  Debited 


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Illustration  No.  26,  Page  i  of  the  Sales  Journal  for  Model  Set. 


A  MODEL  SET. 


63 


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Illustration  No.  27,  Page  2  of  the  Sales  Journal  for  Model  Set. 

9.     Received  $10.00  from  A.  Y.  Jordan  to  apply  on  merchandise  sold  him  on  the 
5th.     (Debit  §  15;   credit  §  27.     Illustration  No.  29.) 

10.  Bought  from  Brown  Bros.,  City,  on  account,  merchandise  per  Purchase  No. 

4,  $230.00.     (Debit  §  17;   credit  §  28.     Illustration  No.  25.) 

11.  Sold  A.  Y.  Jordan,    115   Main  St..   City,  on  account,  merchandise  per  Sale 

No.  3,  $56.25.     (Debit  §  27;   credit  §  18.     Illustration  No.  26.) 

12.  Received  $30.50  from  People's  Hotel  to  apply  on  account. 

13.  Received  $40.00  for  sundry  cash  sales  to  date.     (Debit  §  15;    credit  §  iS.) 
Paid  King  &  King  $100.00  to  apply  on  account.     (Debit  §  28;    credit  §  15.) 
Sold  W.  O.  Burns,  Kingston,  on  account,  merchandise  per  Sale  No.  4,  $54.40. 

(Debit  §  27;   credit  §  18.     Illustration  No.  26.) 

15.  Bought  from  Brown  Bros.,  City,  on  account,  merchandise  per  Purchase  No. 

5,  $248.00.     (Debit  §  17;   credit  §  28.     Illustration  No.  25.) 

Proved  cash  (balance,  $714.20)  and  posted.     (§44;    §  39;    §41;    §  45!   §  46, 
^  5.     Illustrations  Nos.  33,  34,  35  and  36.) 

16.  Sold  People's  Hotel,  165  Willis  St.,  City,  on  account,  merchandise  per  Sale 

No.  5,  $51.40.     (Illustration  No.  26.) 

17.  Bought  from  Lake  View  Creamery, 'Dayton,  on  20  days'  time,  merchandise 

per  Purchase  No.  6,  $30.00.     (Illustration  No.  25.) 

18.  Received  $35.00  from  W.  O.  Burns  to  apply  on  merchandise  sold  him  on  the 

13th.     (Illustration  No.  29.) 

19.  Sold  James  O.  Wills,  416  Broad  St.,  City,  on  account,  merchandise  per  Sale 

No.  6,  $44.30.     (Illustration  No.  26.) 
Allowed  People's  Hotel  credit  for  $9.10,  one  barrel  flour,  purchased  on  the 
i6th,  returned  because  it  had  been  damaged  by  coming  in  contact  with 
kerosene.    (§  18,  ^  i;   §  27,  1|  2;   §  46,  If  2.    Illustration  No.  28.) 

20.  Paid  King  &  King  $36.95  in  full  of  account.     (Illustration  No.  30.) 
Received  $65.00  for  sundry  cash  sales  to  date.     (Illustration  No.  29.) 

22.     Sold  James  C.  Wells,  765  E,  9th  St.,  City,  on  account,  merchandise  per  Sale 
No.  7,  $26.05.     (Illustration  No.  26.) 

{Continued  on  page  6^.) 


6-1 


A  MODEL  SET. 


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Illustration  No.  28,  Page  i  of  the  General  Journal  for  Model  Set. 


A  MODEL  SET.  65 

23.  Bought  from  Brown  Bros.,  City,  on  10  days'  time,  merchandise  per  Purchase 

No.  7,  $199.10.    (Illustration  No.  25.) 
Received  credit  from  Brown  Bros,  for  $12.60,  three  cases  of  canned  peaches 
at  $4.20,  purchased  on  the  loth,  returned  per  agreement.    (§  28,  If  i ;   §  17, 

^2;   §46,112.    Illustration  No.  28.) 

24.  Received  $15.00  from  People's  Hotel  to  apply  on  account. 

25.  Sold  People's  Hotel,  165  Willis  St.,  City,  on  account,  merchandise  per  Sale 

No.  8,  $82.05.    (Illustration  No.  26.) 

26.  Received  $6.25  from  A.  Y.  Jordan  in  full  for  merchandise  sold  him  on  the 

5th.    (Illustration  No.  29.) 
Sold  James  C.  Wells,  765  E.  9th  St.,  City,  on  account,  merchandise  per  Sale 
No.  9,  $44.25.    (Illustration  No.  26.) 

2"].     Sold  People's  Hotel,  165  Willis  St.,  City,  on  account,  merchandise  per  Sale 
No.  10,  $80.25.     (Illustration  No.  26) 

Received  $44.50  for  sundry  cash  sales  to  date.     (Illustration  No.  29.) 

29.  Bought  from  King  &  King,  City,  on  10  days'  time,  merchandise  per  Purchase 

No.  8,  $174.75.     (Illustration  No.  25.) 
Received  $65.00  from  People's  Hotel  to  apply  on  account. 

30.  Paid  Brown  Bros.  $150.00  to  apply  on  merchandise  purchased  on  the  15th. 

(Illustration  No.  30.) 
Sold  James  O.  Wills,  416  Broad  St.,  City,  on  account,  merchandise  per  Sale 

No.  II,  $37.56.    (Illustration  No.  26.) 
Paid  bookkeeper's  salary  for  September,  $75.00;  rent  for  September,  $65.00. 

(§  32,  H  i;   §  15.  H  2.    Illustration  No.  30.) 
Proved  cash  (balance,  $618.00),  and  ruled  the  cash  book.     Posted*  from  the 

purchases,  sales  and  general  journals,  and  the  cash  book.     Footed  and 

ruled  the  purchases  journal  and  sales  journal;   posted  the  total  purchases, 

sales,  cash  receipts  and  cash  payments.    Took  a  Trial  Balance  of  balances; 

checked  the  Trial  Balance  because  it  did  not  balance  due  to  an  error  in 

posting.     (Illustration  No.  37.) 

The  check  marks  on  the  double  line  at  the  left  of  each  amount  in  the  books  of  original  entry 
indicate  that  the  September  Trial  Balance  did  not  balance  and  it  was  necessary  for  the  bookkeeper 
to  check  the  posting  to  ascertain  the  error.  These  check  marks  should  be  made  on  the  double  line  to 
avoid  confusion  with  the  figures.  It  is  not  always  possible  to  show  the  exact  position  of  these  check 
marks  in  the  illustrations  due  to  the  variation  in  printing. 

October 

1.  W.  A.  Gordon  withdrew  $200.00  cash  from  his  capital. 

Bought  from  Dick,  McMillan  &  Co.,  Springfield,  on  15  days'  time,  merchan- 
dise  per   Purchase   No.   9,   $381.78. 

2.  Received  $50.00  from  James  C.  Wells  to  apply  on  account.    He  called  atten- 

tion to  our  error  in  debiting  him  with  the  sale  of  September  30;    made  a 
correcting  entry  to  adjust  this. 

Paid  the  Central  Transfer  Co.  $2.25  cash  for  freight  and  drayage  on  merchan- 
dise purchased  on  September  17. 

3.  Received  $100.00  from   People's  Hotel  to  apply  on  account. 

*The  accounts  resulting  from  this  posting  are  illustrated  on  pages  70-73.  The  arrangement 
of  the  accounts  in  these  illustrations  is  in  the  same  order  as  the  information  will  be  needed  in  the 
preparation  of  the  reports  to  be  provided  the  owner.  The  reports  to  be  prepared  from  these  accounts 
are  explained  in  Chapter  VII. 


66 


A  MODEL  SET. 


3.  Paid  Brown  Bros.  $199.10    in    full    for  merchandise    purchased  on  Sept.  23. 

4.  Sold  J.  C.  Taylor,  3752  Crescent  Ave.,  City,  on  account,  merchandise  per 

Sale   No.    12,   $132.55- 
Received   $87.65   for  sundry  cash   sales  to  date. 

6.  Paid  Mrs.  W.  B.  Scott  $2.50  for  two  brooms  which  she  bought  and  paid  for 

on  the  4th  and  returned  to  us  per  agreement. 
Sold  People's  Hotel,  165  Willis  St.,  City,  on  account,  merchandise  per  Sale 
No.     13,    $142.50. 

7.  Received  $50.00  from  James  O.   Wills  to  apply  on  account. 

Paid  Lake  View  Creamery  $30.00  in  full  for  merchandise  purchased  Sept.  17 

8.  Sold  A.  Y.  Jordan,   115  Main  St.,  City,  on  account,  merchandise  per  Sale 

No.    14,   $38.50. 

9.  Paid    King   &   King  $174.75    in   full   of   account. 

Paid  Brown  Bros.  $200.00  to  apply  on  merchandise  purchased  September  10. 

10.     Sold  A.  Y.  Jordan,   115  Main  St.,  City,  on  account,  merchandise  per  Sale 
No.  15,  $42.50. 


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Illustration  No.  29,  Page  2,  Receipts  Side  of  Cash  Book  for  Model  Set. 


A  MODEL  SET. 


67 


II.     Received  $19.40  from  W.  O.  Burns  in  full  for  merchandise  sold  him  Sept.  13. 
Received  $109.80  for  sundry  cash  sales  to  date. 

13.     Paid  $18.50  for  repairs  in  the  office. 

Sold  People's  Hotel,  165  Willis  St.,  City,  on  account,  merchandise  per  Sale 
No.  16,  $92.90. 

15.  Bought  from  Lake  View  Creamery,  Dayton,  on  20  days'  time,  merchandise 

per    Purchase    No.    10.    $48.00. 
Received   $50.00   from    People's   Hotel    to   apply   on   account. 
Sold  W.  O.  Burns,  Kingston,  on  account,  merchandise  per  Sale  No.  17,  $45.75. 
Proved  cash  (balance,  $257.75)  and  posted. 

16.  Bought  from  Brown  Bros.,  City,  on  30  days'  time,  merchandise  per  Purchase 

No.  II,  $216.50. 
Paid  Dick,  McMillan  &  Co.  $381.78  in  full  of  account. 

17.  Sold  J.  C.  Tavlor,  3752  Crescent  Ave.,  City,  on  account,  merchandise  per 

Sale  No.  18, '$86.42. 
Paid  $5.00  for  stamps. 

18.  Paid  Brown  Bros.  $98.00,  balance  due  on  merchandise  purchased  Sept.  15. 
Received  $129.50  for  sundry  cash  sales  to  date. 


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Illustration  No.  30,  Page  3,  Payments  Side  of  Cash  Book  for  Model  Set. 


68 


A  MODEL  SET. 


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Illustration  No.  31,  Page  4,  Receipts  Side  of  Cash  Book  for  Model  Set. 

20.  Bought  from  King  &  King,  City,  on  30  days'  time,  merchandise  per  Purchase 

No.     12,    $127.65. 
Discovered  an  error  of  $10.00  in  the  calculations  for  the  purchase  from  Brown 
Bros,  on  September  23,  and  received  instructions  from  them  to  debit  their 
account  with  this  amount. 

21.  Sold  J.  C,  Taylor,  3752  Crescent  Ave.,  City,  on  account,  merchandise  per 

Sale    No.    19,    $55.40. 

Sold  a  customer  stamps  for  cash,  50c. 

22.  Received  $3.45  from-  People's  Hotel  in  full  for  all  merchandise  sold  them  in 

September,  less  all  credits  to  date. 
Sold  James  O.  Wills,  416  Broad  St.,  City,  on  account,  merchandise  per  Sale 
No.    20,    $51.40. 

23.  Received   $25.00  from  W.   O.   Burns  to  apply  on  account. 

Sold  People's  Hotel,  165  Willis  St.,  City,  on  account,  merchandise  per  Sale 
No.   21,  $162.25. 

24.  Gave  A.  Y.  Jordan  credit  for  $3.75,  two  hams  sold  him  on  the  loth  and  re- 

turned per  agreement. 
Bought  from  Dick,  McMillan  &  Co.,  Springfield,  on  15  days'  time,  merchan- 
dise   per    Purchase    No.    13,    $117.90. 

25.  Sold  People's  Hotel,  165  Willis  St.,  City,  on  account,  merchandise  per  Sale 

No.   22,  $116.65. 
Received  $20.30  from  James  C.  Wells  in  full  of  account. 

27.     Received  $136.45  for  sundry  cash  sales  to  date. 

Bought  from  Dawson  Bros.  &  Co.,  Lebanon,  on  30  days'  time,  merchandise 
per  Purchase  No.   14,  $307.55. 


A  MODEL  SET. 


69 


^ — t^-.^i^-^n^ 


27. 


28. 


29. 


30. 


31 


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Illustration  No.  32,  Page  5,  Payments  Side  of  Cash  Book  for  Model  Set. 

Sold  W.  O.  Burns,  Kingston,  on  account,  merchandise  per  Sale  No.  23,  $12.50. 
Shipped  package  to  him  by  parcel  post  and  debited  his  account  with  6oc, 
the  required  amount  of  postage. 

Sold  James  O.  Wills,  416  Broad  St.,  City,  on  account,  merchandise  per  Sale 

No.   24,  $38.65. 
Bought  from  King  &  King,  City,  on  30  days'  time,  merchandise  per  Purchase 

No.     15,    $141.37- 

Received  $50.00  from  People's  Hotel  to  apply  on  account. 
Sold  Robert  E.  Cowan,  3175  Burnet  Ave.,  City,  on  account,  merchandise 
per    Sale    No.    25,    $61.83. 

Received  $56.25  from  A.  Y.  Jordan  for  balance  due  on  merchandise  sold  him 
September  11. 

Received  $150.00  from  J.  C.  Taylor  to  apply  on  account. 

Received   $87.19   for  sundry  cash  sales  to  date. 

Paid  bookkeeper's,  salary  for  October,  $75.00;    rent  for  October,  $65.00. 

Proved  cash  (balance,  $291.61)  and  ruled  the  cash  book. 

Took  stock  of  the  merchandise  in  the  store  so  that  the  bookkeeper  might  prepare 
the  necessary  reports  showing  the  assets,  liabilities,  income,  costs  and  net 
income  for  the  two  months  during  which  the  business  has  been  operated. 
The  usual  monthly  Trial  Balance  was  taken  including  the  information 
necessary  in  the  preparation  of  reports.    Balanced  the  Cash  account. 

The  foregoing  instructions  include  posting  all  entries,  ruling  the  purchases  and  sales  journal, 
and  the  posting  of  the  total  purchases,  sales,  cash  receipts  and  cash  payments.  The  results  of  the 
instructions  are  shown  in  Illustrations  Nos.  25-36  and  38.  The  Cash  account  after  it  is  balanced 
is  shown  at  the  top  of  page  70;  it  is  customary  to  balance  the  Cash  account  at  the  end  of  the  busi- 
ness year.  The  work  of  preparing  the  reports  of  the  operations  of  the  business  showing  the  facts 
which  Mr.  Gordon  desires  are  explained  in  Chapter  VII. 


70 


A  MODEL  SET. 


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A  MODEL  SET. 


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72 


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A  MODEL  SET. 


73 


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74  A  MODEL  SET. 


Illustration  No.  37,  Trial  Balance  of  Balances  for  First  Month  of  Model  Set. 


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Illustration  No.  38,  Trial  Balance  for  Second  Month  of  Model  Set. 
The  purpose  of  showing  both  sides  of  the  Purchases  and  Sales  accounts,  the  merchandise  in- 
ventory at  the  beginning  of  the  fiscal  period  and  purchases  during  the  period  is  explained  in  Chapter  VI I . 


A  MODEL  SET  75 

Exercise  No.  26,  Recording  Transactions,  Posting  and  Trial  Balance. 

Record  the  transactions  given  below  in  the  purchases,  sales  and  general  jour- 
nals, and  the  cash  book.  All  purchases  and  sales  except  those  for  c  sh  are  "on 
account"  and  are  entered  in  the  purchases  or  sales  journal;  number  the  entries  in 
each  of  these  journals  in  regular  order,  beginning  with  one. 

April    I.  J.  N.   Fulton  invests  $1,500.00  in  the  radio  supply  business. 

2.  Bought   from   Standard    Radio   Co.,    Chicago,   supplies,  $681.70. 

3.  Paid   rent  for  month,   $45.00,   and   telephone  service,  $15.00. 

4.  Sold  Davis  Bros.,  City,  100  ft.  No.  14  aerial  wire,  45c;    i  Willard  radio 

storage   battery,   $12.00. 

5.  Paid   $365.87    for   cash    purchase   of   radio   supplies. 

9.  Bought  from  the  Radio  Service  Co.,   Dayton,   supplies,  $962.48. 

12.  Paid  $37.50  insurance  on  stock.      (Debit  Expense.) 

15.  Received   for  cash   sales   to  date,   $350.60. 

17.  Paid   $25.00   for  stamps  and   stationery. 

18.  Paid   Standard    Radio   Co.   $38.70,   on   account. 

Received  credit  from  Radio  Service  Co.  for  supplies  returned,  $20.15. 

19.  Sold   Caleb   Fall,   City,    i   Thordarson  amplifying  transformer,   $4.00; 

I   Remler  detector  panel,  $8.00. 

20.  Sold  Jacob  Dolittle,  City,  200  ft.  7-strand  aerial  wire,  $1.50;     i  doz. 

aerial   insulators,   $3.00;     2   test  buzzers,   $1.30;     2   Willard   storage 
batteries,   $24.00;     2   doz.   switch   points,   60c. 

23.  Sold  Joe  Smith,  for  cash,  200  ft.  No.   14  aerial  wire,  90c. 

24.  Gave  Joe  Smith  45c  for  100  ft.  aerial  wire  which  he  returned. 

26.  Received  $15.00  from  Jacob   Dolittle,   to  apply  on  account. 

27.  Sold  A.  J.  Bowen,  Columbus,  i  mounted  crystal  detector,  $1.95.     Debit 

his  account  with   75c,   postage  required   on   this  shipment. 
30.     Sold  A.  F.  Shaw,  City,  i  complete  radio  outfit,  $125.00,  to  be  installed 

under   our   inspection,    installation   cost   to   be   paid    by   him. 
Received    for   cash   sales   to   date,    $414.85. 
Paid  clerk's  salary,  $80.00. 

Prove  cash  (balance,  $1,673.83),  rule  the  cash  book  and  purchases  and  sales 
journals,  and  post  all  entries  including  the  totals.  Arrange  the  accounts  in  the  ledger 
as  in  the  Model  Set,  allowing  five  lines  for  each  personal  account  and  eight  lines  for 
each  of  the  other  accounts.    Take  a  Trial  Balance  of  balances. 

May     I.     Sold  Davis  Bros.,  City,  6  "B"  Batteries,  22^/^  volt,  $11.70;     i   loud 
speaker,   $15.00;     i    filament  rheostat,   $1.25, 

2.  Bought  from  Standard   Radio  Co.,   Chicago,  supplies,  $343.60. 
Received  for  cash  sales  to  date,  $157.81. 

Gave   the   Radio  Service   Co.   $600.00   to  apply  on   account. 

3.  Sold   Caleb  Fall,   City,    i    New  Howard   rheostat,   $1.10;     6  porcelain 

V.   T.    sockets,   $2.70. 
Received  check  from  A.  J.  Bowen  in  full  of  account. 
Received  a  bill   from  the   Kelly  Electric   Co.   for  $24.50,   installation 

cost  of  the  radio  outfit  sold  A.  F.  Shaw  on  April  30. 

Debit  A.  F.  Shaw  and  credit  Kelly  Electric  Co.  in  the  general  journal. 

4.  Paid  Lawton   Express  Co.  $26.17,   freight  and  drayage  on   purchases. 
Gave  Caleb  Fall  credit  for  45c  because  one  of  the  porcelain  V.  T.  sockets 

sold  him  on  the  third  was  defective. 
Sold  the  entire  stock  of  merchandise  for  $2,000.00  cash. 

Prove  cash  (balance  $3,208.17),  rule  the  cash  book  and  purchases  and  sales  jour- 
nals, and  post  all  entries  including  the  totals.  Take  a  Trial  Balance,  using  both  sides 
of  the  Sales  and  Purchases  accounts  and  the  balances  of  the  other  accounts. 

Retain  the  ledger  and  Trial  Balance  for  use  in  Exercise  No.  40. 


76  QUESTIONS  ON  THE  MODEL  SET. 

QUESTIONS  ON  THE  MODEL  SET 

These  questions  refer  to  Illustrations  Nos.  25-38. 

1.  What  do  the  check  marks  (v)  at  the  left  of  the  amounts  in  the  books  of 

original  entry,   ledger,   and   Trial   Balance   for   the   month  of  September, 
indicate? 

2.  Why  are  there  no  check  marks  at  the  left  of  the  amounts  for  the  month  of 

October? 

3.  Why  did  the  Trial  Balance  September  30  balance  when  there  was  an  error 

in  one  of  the  accounts  as  indicated  by  the  adjusting  entry  in  the  general 
journal  October  2  ? 

Explain  the  transactions  recorded  in  the  account  of  A.  Y.  Jordan  without 
referring  to  a  book  of  original  entry. 

Why  is  the  Expense  account  credited  in  the  general  journal  entry  of   Oc- 
tober 27? 

Does  the  general  journal  entry  of  October  2  change  the  value  of  the  assets 
or  liabilities  of  the  business? 

Why  is  the  People's  Hotel  account  not  ruled  on  the  same  blue  line  on  each 

side  on  October  22? 
Explain  the  transactions  in  the  account  of  Brown   Bros,  without  referring 

to  a  book  of  original  entry. 

When  is  payment  due   for  the   merchandise  purchased   from   Brown   Bros. 

October  16? 
Why  are  both  sides  of  the  account  with  Brown  Bros,  carried  forward  and 

the  balance  of  the  account  with  the  People's  Hotel  carried  forward? 
What  indicates  that  the  People's  Hotel  account  is  that  of  a  customer  and 

Brown  Bros,  that  of  a  creditor? 
What  is  the  balance  due  on  the  merchandise  sold  A.  Y.  Jordan  October  10? 
Why  not  forward  the  totals  of  both  columns  of  the  general  journal  in  the 

same  manner  as  the  totals  of  the  purchases  journal  and  sales  journal? 
Why  is  the  total  of  each  side  of  the  cash  book  forwarded  and  not  the  balance? 
When  is  it  necessary  to  forward  the  totals  of  a  book  of  original  entry? 
What  information  is  shown  in  the  Cash  account  which  is  not  shown  in  the 

cash  book? 
Why  is  the  double  ruling  in  the  cash  book  on  the  same  blue  line  on  each  side? 
Why  is  it  necessary  to  write  in  the  cash  book  the  date  of  the  purchase  or  sale 

when  cash  is  paid  or  received  to  apply  on  that  particular  purchase  or  sale? 
Why  is  the  cash  balance  carried  down  below  the  double  ruling  on  the  debit 

side  of   the   cash   book  and   entered    in   the   second   column? 
W^hat  information  of  value  does  the  owner  of  the  business  obtain  from   the 

entries  on  the  debit  side  of  the  Sales  account? 
Why  is  the  Purchases  account  credited  in  the  general  journal  entry  of  Sep- 
tember 23? 
Why  is  the  Sales  account  debited  in  the  general  journal  entry  of  October  24? 
If  Sales  had  been  credited  for  the  first  transaction    of  October  23,    (a)    what 

accounts  would   have   been   affected   and    (b)    how  afifected? 
If  the  owner  wished  to  know  the  value  of  merchandise  in  stock,  from  what 

accounts  could  he  ascertain  this  information? 
Why  is  W.  O.  Burns  debited  in  the  general  journal  entry  of  October  27? 


Chapter  VII 

BALANCE  SHEET  AND  STATEMENT  OF  PROFIT  AND  LOSS 

The  Purpose  of  this  Chapter  is  to  explain  the  Balance  Sheet  and  Statement 
of  Profit  and  Loss — two  reports  prepared  by  the  bookkeeper  for  the  information 
of  the  owner.  The  illustrations  are  applicable  to  the  business  of  W.  A.  Gordon  in 
the  Model  Set,  Chapter  VL  The  income  tax  return  for  an  individual  is  explained 
and  illustrated  in  Appendix  C. 

§  47.  Fiscal  Period.  The  owner  of  a  business  will  want  to  know  from  time 
to  time  the  results  of  his  operations  because  he  has  invested  cash  or  other  assets  in 
the  business  with  the  purpose  of  making  a  profit.  Since  the  Federal  Government 
requires  a  report  of  the  results  of  the  operations  of  the  business  for  one  year  in 
order  to  ascertain  the  amount  of  income  tax  the  business  is  to  pay,  the  owner 
usually  ascertains  the  results  of  operating  the  business  yearly.  However,  if  the 
nature  of  the  business  is  such  that  the  profit  should  be  ascertained  more  often, 
the  owner  can  obtain  this  information  at  such  times  as  he  desires,  but  this  does 
not  release  him  from  the  yearly  report  required  by  the  Federal  Government.  The 
period  of  operation  for  which  the  profit  is  ascertained  is  referred  to  as  the  fiscal 
period,  which,  as  explained,  may  be  for  one  year  or  such  part  of  a  year  as  the  owner 
may  designate. 

§  48.  Method  of  Ascertaining  the  Profit  or  Loss.  The  profit  or  loss 
resulting  from  the  operations  of  a  business  is  (i)  the  difference  between  the  pro- 
prietorship at  the  beginning  and  the  proprietorship  at  the  end  of  a  fiscal  period, 
and  (2)  the  difference  between  the  income  and  the  cost  for  the  period.  If  the 
value  received  and  the  value  parted  with  in  each  transaction  are  recorded,  the 
profit  or  loss  will  be'  the  same  with  each  of  the  two  methods.  When  ascertaining 
the  profit  or  loss  by  subtracting  the  proprietorship  at  the  beginning  and  end  of 
the  period,  it  is  necessary  to  take  into  consideration  withdrawals  from  capital 
and  additional  investments  during  the  period. 

The  proprietorship  of  W.  O.  Crosswhite,  a  retail  grocer,  January  I,  is  $8,000.00,  and  on  Dec- 
ember .•^i  of  the  same  year,  $11,50000.  If  he  has  not  withdrawn  part  of  his  invested  capital  or 
invested  additional  capital  during  the  year,  his  net  profit  is  $3,500.00;  if  he  had  withdrawn  $500.00 
from  his  capital  during  the  year,  his  net  profit  would  have  been  $4,000.00,  and  if  he  had  invested 
an  additional  $500.00  during  the  year,  his  net  profit  would  have  been  $3,000.00.  If,  during  the- 
same  year,  the  income  resulting  from  the  operations  of  the  grocery  business  conducted  by  Mr. 
Crosswhite  is  $6,500.00  and  the  cost,  $3,000.00,  his  net  profit  is  $3,500.00.  It  is  necessary  for  Mr. 
Crosswhite  to  know  the  amount  of  the  income  and  cost  as  well  as  the  net  profit,  because  he  must 
submit  this  information  on  his  income  tax  return  as  explained  in  Appendix  C. 

§  49.  A  Merchandise  Inventory  is  the  value  of  all  merchandise  in  stock 
at  the  close  of  a  fiscal  period  as  shown  by  a  written  list  of  this  merchandise.  The 
information  on  this  list  includes  the  quantity  and  description  of  each  kind  of 
merchandise  and  its  value  at  cost  or  present  market  price  whichever  is  the  lower. 

It  is  necessary  to  ascertain  the  value  of  the  merchandise  owned  by  the  business 
through  an  inventory  at  the  close  of  the  fiscal  period  because  it  is  one  of  the  assets 
and  its  value  is  not  shown  in  either  the  Purchases  or  the  Sales  account.    The  Pur- 

77 


78 


MERCHANDISE  INVENTORY. 


chases  account  shows  the  cost  of  the  merchandise  bought,  and  the  Sales  account 
the  returns  from  sales,  but  the  value  of  the  merchandise  in  stock  is  not  shown  as 
a  result  of  this  record  because  the  selling  price  is  greater  than  the  cost  price. 

A  unit  record  of  the  merchandise  purchased  and  sold  may  be  kept  in  certain  lines  of  business, 
such  as  musical  instruments,  shoes,  clothing,  and  furniture;  but  in  other  lines,  such  as  hardware, 
groceries,  and  dry  goods,  it  is  not  practicable  to  keep  a  record  of  each  unit  purchased  and  sold.  It 
is  necessary  to  ascertain  the  value  of  merchandise  in  stock  by  an  inventory  at  the  close  of  the  fiscal 
period  whether  or  not  a  record  of  the  units  purchased  and  sold  is  kept,  because  of  thefts,  errors  in 
filling  orders,  and  many  other  causes  which  result  in  the  number  of  units  shown  by  the  record  not 
corresponding  with  the  number  of  units  on  hand. 

An  inventory  of  the  following  merchandise  owned  by  W.  A.  Gordon  and  in 
stock  by  actual  count  at  the  close  of  the  fiscal  period  ending  October  31,  would 
appear  in  inventory  form  as  in  Illustratfon  No.  39: 

Granulated  sugar,  1,216  lbs.,  cost  $4.50  per  100  lbs.;  1,183  lbs.  brown  sugar, 
cost  $4.10  per  100  lbs.;  256  lbs.  roasted  coffee,  cost  22c  per  lb.;  1,802  lbs.  bacon, 
cost  15c  per  lb.;  8  hams,  183  lbs.,  cost  17c  per  lb.;  5  cans,  261  lbs.,  lard,  cost  i6c 
per  lb.;  24  doz.  cans  tomatoes,  cost  $1.10  per  doz.;  20  doz.  cans  pineapples,  cost 
$2.00  per  doz.;  18  doz.  cans  peaches,  cost  $1.95  per  doz.;  20  doz.  cans  corn,  cost 
$1.50  per  doz.;  268  lbs.  creamery  butter,  cost  33c  per  lb.;  60  bbls.  Blue  Ribbon 
flour,  cost  $5.10  per  bbl.;  34  bbls.  White  Rose  flour,  cost  $5.25  perbbl.;  25  bbls. 
Fancy  flour,  cost  $6.00  per  bbl.;  25  bu.  beans,  cost  $1.60  per  bu.;  20  bxs.  Werk's 
soap,  cost  $4.00  per  box. 


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Illustration  No.  39,  Inventory  of  Groceries,   Model  Set. 


EXPLANATION.  The  quantities  indicated  by  the  figures  at  the  left  were  obtained  by  weigh- 
ing or  counting  the  articles  in  stock.  The  price  was  ascertained  from  the  invoices.  This  price  in- 
cludes not  only  the  invoice  cost  but  also  the  freight  cost.  The  figures  at  the  right  were  ascertained 
by  multiplying  the  quantity  by  the  price. 


BALANCE  SHEET.  79 

Exercise  No.  27,  Merchandise  Inventory. 

Prepare  on  journal  paper  an  inventory  for  the  following  merchandise  owned 
by  the  Fred  B.  Jenkins  Hardware  Co.  and  in  stock  December  31  : 

Nails,  10  kegs  8-d.,  cost  $4.50  per  keg;  15  kegs  lo-d.  nails,  cost  $4.25  per  keg; 
12  doz.  No.  9  hammers,  cost  $9.00  per  doz. ;  7  doz.  No.  4  Simmons  saws,  cost  $10.00 
per  doz.,  present  market  price,  $900  per  doz.;  5  doz.  No.  3  hatchets,  cost  $8.00 
per  doz.,  present  market  price  $7.00  per  doz.;  50  gal.  Lucas  paint,  cost  $1.75  per 
gal.,  present  market  price,  $1.60  per  gal.;  25  gal.  varnish,  cost  $2.00  per  gal.;  159 
lbs.  white  lead,  cost  42c  per  lb.;   5  No.  3  gas  stoves,  cost  $7.50  each. 

Exercise  No.  28,  Merchandise  Inventory. 

Prepare  on  journal  paper  an  inventory  for  the  following  merchandise  owned 
by  U.  R.  Underhill  Stationery  Co.,  and  in  stock  June  30: 

Typewriter  desks,  8,  cost  $65.00  each;  5  used  typewriters,  cost  $62.50  each; 
7  chairs,  cost  $4.50  each;  3  bookkeeper's  desks,  cost  $27,50  each;  14  loose-leaf 
ledgers,  cost  $16.50  each;  27  sections  No.  9  filing  cases,  cost  $5.60  each;  5  filing 
cases,  cost  $6.50  each;  500  reams  typewriting  paper,  cost  35c  per  ream,  present 
market  price,  38c  per  ream;  65  reams  legal  paper,  cost  90c  per  ream,  present 
market  price,  97c  per  ream;    150  doz.  pen  points,  cost  32c  per  doz.. 

THE  BALANCE  SHEET 
§  50.  The  Balance  Sheet  is  a  written  report  of  the  assets,  liabilities, 
and  proprietorship  of  a  business  prepared  at  the  close  of  a  fiscal  period.  The 
information  is  obtained  from  the  asset  and  liability  accounts  in  the  ledger  (Trial 
Balance)  and  the  merchandise  inventory  at  the  close  of  the  fiscal  period.  The 
assets  are  usually  listed  as  follows:  cash,  notes  receivable  (written  promises  to 
pay  money  to  the  business),  accounts  with  customers,  and  merchandise  inventory. 
The  liabilities  are  usually  listed  as  follows:  notes  payable  (written  promises  signed 
by  the  business),  and  accounts  with  creditors.  The  accounts  should  be  arranged 
in  the  ledger  in  the  order  in  which  they  appear  on  the  Balance  Sheet. 

The  Balance  Sheet  may  be  prepared  in  "account"  form  (Illustration  No.  40)  or  "report" 
form  (Illustration  No.  41).  Either  form  is  correct,  but  accountants  usually  prefer  the  account 
form  because  it  shows  assets  opposite  liabilities;  this  information  is  of  value  to  the  owner  of  the 
business  in  determining  his  financial  condition  because  the  liabilities  must  be  paid  out  of  the  assets. 

The  assets  and  liabilities  of  W.  A.  Gordon  as  shown  by  the  accounts  in  his 
ledger  on  pages  70,  71  and  72,  October  31,  are  as  follows: 
Assets : 

Cash $291 .61 

Accounts  Receivable: 

A.  Y.  Jordan 77-25 

W.O.Burns 33.85    • 

James  O.  Wills 121 .91 

J.  C.  Taylor 124.37 

Robt.  E.  Cowan 61 .  83 

People's  Hotel 464 .  30 

Liabilities: 

Accounts  Payable: 

King  &  King 269.02 

Lake  View  Creamery 48.00 

Dick,  McMillan  &  Co 117.90 

Dawson  Bros.  &  Co 307 .  55 

Brown  Bros 223 .  90 

Merchandise  Inventory,  October  31  (Illustration  No.  39),  $1,477.15. 
A  Balance  Sheet  prepared  in  account  form  from  this  information  will  appear 
as  in  Illustration  No.  40,  and  in  report  form,  as  in  Illustration  No.  41. 


8o 


BALANCE  SHEET. 


Illustration  No.  40,  Balance  Sheet  for  Model  Set,  "Account"  Form. 

EXPLANATION.  This  illustration  shows  the  Balance  Sheet  for  W.  A.  Gordon,  prepared 
in  "account"  form  from  the  accounts  in  the  ledger  on  pages  70,  71  and  72  (Trial  Balance,  page  74) 
and  the  inventory  of  merchandise,  page  78.  The  same  information  is  shown  in  "report"  form  in 
the  illustration  below. 


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Illustration  No.  41,  Balance  Sheet  for  Model  Set,  "Report"  Form. 


BALANCE  SHEET.  8i 

Exercise  No.  29,  Balance  Sheet. 

Prepare  a  Balance  Sheet  in  account  form  for  J.  J.  Hagan,  who  is  engaged  in 
the  office  supplies  business,  from  the  following  assets  and  liabilities  as  shown  by 
the  accounts  in  his  ledger  at  the  close  of  the  fiscal  period,  December  31: 

Assets : 

Cash $357-50 

Accounts  Receivable: 

L.  A.  Stallman 150.00 

W.  R.  Jones 63 .  50 

Sinton  Hotel 132 .  65 

W.  H.  Wilson 14-50 

Robert  W.  Hill 35  -  00 

J.  J.  Anderson 36. 18 

H.  R.  Kraus 130.00 

Liabilities : 

Accounts  Payable: 

A.  Martin  Stationery  Co $180.00 

Hall  Bros 127.50 

Laurence  &  Scott 205 .  07 

O.  L.  Robertson 192 .  90 

Central  Mfg.  Co 182.55 

Globe-Wernicke  Co 100.00 

Merchandise  Inventory,  December  31,  $865.40. 


Exercise  No.  30,  Balance  Sheet. 

Prepare  a  Balance  Sheet  in  account  form  for  C.  M.  Becket,  a  hardware  mer- 
chant, from  the  following  assets  and  liabilities  as  shown  by  the  accounts  in  his 
ledger  at  the  close  of  the  fiscal  period,  June  30: 

Assets : 

Cash ." $850 .  00 

Accounts  Receivable: 

C.  R.  Carter 50 .  00 

J.  A.  Smith 38.50 

John  B.  Dawes 76. 19 

A.  J.  Baird  &  Son 39-90 

Johnson  Construction  Co 125.50 

B.  H.  Franklin 207 . 90 

C.  C.  Ernst 260.00 

Liabilities: 

Accounts  Payable: 

Evans  Bros.  Hdwe.  Co $160.00 

D.  D.  Bowen 350 . 00 

Smith  Bros 107 .  60 

A.  L.  Games  &  Co 1 35  •  00 

Pickering  Hardware  Co 150.00 

Merchandise  Inventory,  June  30,  $442.85. 


44 

75 

52 

40 

452 

oo 

9 

65 

55 

15 

82  STATEMENT  OF  PROFIT  AND  LOSS. 

Exercise  No.  31,  Balance  Sheet. 

Prepare  a  Balance  Sheet  in  report  form  for  C.  H.  Sheller,  an  automobile  dealer, 
from  the  following  assets  and  liabilities  as  shown  by  the  accounts  in  his  ledger  at 
the  close  of  the  fiscal  period,  July  31: 

Assets : 

Cash $6,741 .85 

Accounts  Receivable: 

J.  W.  Hayes 

J.J.Davis 

Robert  Humphries - 

A.  L.  Arnot 

T.  M.  Bowen 

Liabilities: 

Accounts  Payable : 

Packard  Automobile  Co $1,500.00 

Warner-Lenz  Co 152 .  50 

Goodyear  Rubber  Co 250.00 

Citizens  Motor  Car  Co 350.00 

Merchandise  Inventory,  July  31,  $6,181.75. 

STATEMENT  OF  PROFIT  AND  LOSS 

§  51.  The  Statement  of  Profit  and  Loss  is  a  written  report  of  the  income, 
costs,  and  net  profit  or  loss  resulting  from  the  operations  of  a  business  during  a 
fiscal  period,  prepared  at  the  close  of  the  period.  This  information  is  obtained 
from  the  income  and  cost  accounts  in  the  ledger  (Trial  Balance)  and  the  inven- 
tory of  merchandise  at  the  close  of  the  period.  The  report  should  show  (i)  the  net 
sales,  (2)  the  cost  of  the  merchandise  sold,  (3)  the  profit  made  by  selling  mer- 
chandise, (4)  the  operating  cost  of  the  business,  and  (5)  the  net  profit  or  loss. 
The  accounts  should  be  arranged  in  the  ledger  in  the  order  in  which  they  appear 
on  the  Statement  of  Profit  and  Loss  so  that  this  report  can  be  prepared  from  the 
Trial  Balance  without  rearranging  the  accounts  thereon. 

The  Statement  of  Profit  and  Loss  may  be  prepared  in  account  form  or  in  report  form  (Illus- 
tration No.  42),  the  same  as  the  Balance  Sheet.  Accountants  usually  prefer  the  report  form  because 
the  deductions  in  connection  with  ascertaining  the  profit  on  sales  and  the  operating  cost  of  the  busi- 
ness can  be  shown  more  distinctly  in  this  form. 

The  income,  costs,  and  beginning  inventory  of  W.  A.  Gordon,  as  shown  by 
the  accounts  in  his  ledger  October  31,  page  73,  are  as  follows: 

Income: 

Sales  of  merchandise $2,364.00 

Less  merchandise  returned  by  customers 15-35 

Costs : 

Inventory,  September  i  (beginning) 500.00 

Purchases  of  merchandise  during  the  period. 2,635. 10 

Less  merchandise  returned  to  creditors 22.60 

Expense  (operating  cost)  for  the  period 327.40 

The  merchandise  inventory  at  the  close  of  the  fiscal  period,  October  31 
(Illustration  No.  39),  is  $1,477.15. 

A  Statement  of  Profit  and  Loss  prepared  in  report  form  from  this  information 
will  appear  as  in  Illustration  No.  42. 


STATEMENT  OF  PROFIT  AND  LOSS. 


83 


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Illustration  No.  42,  Statement  of  Profit  and  Loss  for  Model  Set,  "Report"  Form. 

EXPLANATION.  This  illustration  shows  the  Statement  of  Profit  and  Loss  (income  and  cost) 
for  W.  A.  Gordon,  prepared  in  "report"  form  from  the  income  and  cost  accounts  in  the  ledger  on 
page  73  (Trial  Balance,  page  74)  and  the  inventory  of  merchandise,  page  78.  The  same  information 
may  be  shown  in  "account"  form  in  the  same  manner  as  in  the  Balance  Sheet,  Illustration  No.  40. 
Sales  Cr.  minus  Sales  Dr.  equals  net  returns  from  sales;  Purchases  Dr.  minus  Purchases  Cr.  equals 
net  purchases;  net  purchases  minus  inventory  at  the  close  of  the  fiscal  period  equals  cost  of  mer- 
chandise sold;  net  returns  from  sales  minus  cost  of  merchandise  sold  equals  profit  made  by  selling 
merchandise;  profit  made  by  selling  merchandise  minus  Expense  Dr.  equals  net  profit.  The  "Proof" 
shown  on  this  statement  is  explained  in  §  52. 

Exercise  No.  32,  Statement  of  Profit  and  Loss. 

Prepare  a  Statement  of  Profit  and  Loss  for  L.  M.  Hazen,  a  retail  grocer,  from 
the  following  information  obtained  from  the  accounts  in  his  ledger  at  the  close  of 
the  fiscal  period,  December  31: 

Income: 

Sales  of  merchandise $685.29 

Less  merchandise  returned  by  customers 37-10 

Costs: 

Inventory,  July  i  (beginning) 801 .25 

Purchases  of  merchandise  during  the  period 489.50 

Less  merchandise  returned  to  creditors 24.35 

Expense  (operating  cost)  for  the  period 78.50 

The  inventory  of  rnerchandise,  December  31,  is  $862.45. 


84  RELATION  BETWEEN  THE  TWO  REPORTS 

Exercise  No.  33,  Statement  of  Profit  and  Loss. 

Prepare  a  Statement  of  Profit  and  Loss  for  A.  Reagan,  a  retail  jeweler,  from  the 
following  information  obtained  from  the  accounts  in  his  ledger  at  the  close  of  the 
fiscal  period,  March  31: 

Income: 

Sales  of  merchandise $1,016.68 

Less  merchandise  returned  by  customers 20. 10 

Costs : 

Inventory,  January  i  (beginning) 1,216.31 

Purchases  of  merchandise  during  the  period 458.90 

Less  merchandise  returned  to  creditors 21. 11 

Expense  (operating  cost)  for  the  period 154.70 

The  inventory  of  merchandise,  March  31,  is  $1,127.36. 

Exercise  No.  34,  Statement  of  Profit  and  Loss. 

Prepare  a  Statement  of  Profit  and  Loss  for  C.  H.  Sheller,  an  automobile  dealer, 
from  the  following  information  obtained  from  the  accounts  in  his  ledger  at  the  close 
of  the  fiscal  period,  July  31 : 

Income: 

Sales  of  merchandise $4,907.54 

Less  merchandise  returned  by  customers loi  .32 

Costs: 

Inventory,  January  i  (beginning) 5,000.00 

Purchases  of  merchandise  during  the  period 4,506.96 

Less  merchandise  returned  to  creditors 210. 11 

Expense  (operating  cost)  for  the  period 406 .  07 

The  inventory  of  merchandise,  July  31,  is  $6,181.75. 

§  52.  Relation  Between  the  Two  Reports.  The  Balance  Sheet  and 
Statement  of  Profit  and  Loss  have  been  discussed  independent  of  each  other  be- 
cause the  purpose  of  the  discussion  was  to  explain  the  nature  of  each  report.  How- 
ever, there  is  a  relation  between  these  two  reports  because  the  information  is 
obtained  from  the  accounts  which  show  the  results  of  recording  business  trans- 
actions completed  by  a  business  during  a  fiscal  period. 

If  all  the  accounts  on  pages  70,  71,  72  and  73  are  checked  with  those  accounts 
used  in  preparing  the  Balance  Sheet  (Illustration  No.  40)  and  the  Statement 
of  Profit  and  Loss  (Illustration  No.  42),  it  will  be  observed  that  the  only  account 
not  appearing  on  either  of  the  two  reports  is  that  with  W.  A.  Gordon,  Capital; 
also  that  the  Balance  Sheet  shows  the  capital  of  W.  A.  Gordon  as  a  different  amount 
from  that  shown  by  his  Capital  account  in  the  ledger.  The  reason  his  Capital 
account  as  it  appears  at  the  close  of  the  fiscal  period  is  not  shown  on  either  report 
is  that  his  proprietorship  has  increased  through  the  operations  of  the  business;  in 
this  case  the  increase  is  $385.90,  the  difference  between  the  net  investment  and 
the  proprietorship  at  the  close  of  the  period,  also  the  difference  between  the  income 
and  cost. 

Because  of  this  relation  between  the  two  reports,  the  bookkeeper  can  prove 
the  correctness  of  each  report  before  submitting  it  to  the  owner  of  the  business. 
A  proof  of  the  reports  in  Illustrations  Nos.  40  and  42  is  given  below  the  Statement 
of  Profit  and  Loss,  Illustration  No.  42.  If  desired,  this  same  proof  may  be  shown 
in  connection  with  the  Balance  Sheet. 

It  is  customary  to  show  assets,  liabilities,  and  proprietorship  on  the  Balance  Sheet,  and  income, 
costs,  and  the  net  profit  on  the  Statement  of  Profit  and  Loss;  hence  the  proof  of  the  two  reports 
may  be  made  separate  from  the  reports  or  in  connection  with  one  of  them. 


QUESTIONS  85 

Exercise  No.  35,  Balance  Sheet  and  Statement  of  Profit  and  Loss. 

Prepare  a  Balance  Sheet  in  report  form  and  a  Statement  of  Profit  and  Loss 
from  the  following  Trial  Balance  and  inventory  of  merchandise,  May  31: 

Cash $2,192.35 

Novelty  Gift  Shop 764 .  50 

Wharton  &  Co 810.30 

Timmich  Art  Co $     743 .  90 

Sadler  Printing  Co 956.30 

American  Paper  Mills 374.05 

Counts  Bros 78  •  98 

T.  B.  Stone,  Capital 2,000.00 

Sales 10.10  2,399. 17 

Purchases  (Inventory,  May  i,  $1,012.75) 2,621.45  26.30 

Expense 180 .  00 

$6,578.70  $6,578.70 

Merchandise  Inventory,  May  31,  $826.80. 

Exercise  No.  36,  Balance  Sheet  and  Statement  of  Profit  and  Loss. 

Prepare  a  Balance  Sheet  in  report  form  and  a  Statement  of  Profit  and  Loss 

from  the  following  Trial  Balance  and  inventory  of  merchandise,  June  30: 

Cash $2,330.51 

Rogers  Seed  Market 535 .  65 

Terry  Grocery  Co 1,156.20 

Farmers  Exchange 269.49 

Evergreen  Flower  Shop 282 .90 

A.  R.  Trimble 661 .  76 

Brookville  Nurseries $2,364.09 

Empire  Seed  Co 1,327.84 

L.  D.  R.  Rowland,  Capital 2,500.00 

Sales 32.01              2,595.20 

Purchases  (Inventory,  June  i,  $906.75) 3,296.95                  61 .  13 

Expense 282.79 

$8,848.26  $8,8^8.26 

Merchandise  Inventory,  June  30,  $740.22. 

QUESTIONS 

1.  If  Robert  Brown  pays  $5,000.00  cash  for  a  grocery  business  on  January  i, 

1920,  and  sells  it  for  $6,500.00  cash  on  December  31,  192 1,  does  this  indicate 
that  the  net  profit  resulting  from  the  operations  of  the  business  is 
$1,500.00? 

2.  On  June  30,  1921,  George  A.  Clark,  who  owns  and  operates  a  gasoline  service 

station,  wishes  to  borrow  $2,000.00  from  the  bank  and  is  requested  to  make 
a  report  to  the  bank  of  the  financial  condition  of  his  business.  Would  the 
bank  require  a  Balance  Sheet  or  a  Statement  of  Profit  and  Loss?  What 
information  would  it  require? 

3.  What  is  A.  L.  Day's  profit  or  loss  for  the  year  1922  if  his  proprietorship  at 

the  beginning  of  the  year  is  $3,000.00;  investments  during  the  year, 
$1,000.00;  withdrawals  during  the  year,  $500.00;  and  his  proprietorship 
at  the  end  of  the  year  is  $5,000.00? 


86  QUESTIONS 

4.  October  31,  1921,  the  profit  and  loss  accounts  of  J.  B.  Sullivan  as  shown  by 

the  Trial  Balance  taken  on  that  date  are  as  follows:  General  Expense, 
$857.50;  Selling  Expense,  $1,252.80;  Delivery  Expense,  $609.75;  Sales,  Dr., 
$165.60,  Cr.,  $3,875.92;  Purchases,  Dr.,  $1,888.95,  Cr.,  $32.50.  The  mer- 
chandise inventory  is  $561.12.  Has  his  business  been  operated  at  a  profit 
or  a  loss?    State  the  amount  of  the  profit  or  loss. 

5.  L.  J.  Strong  has  been  offered  the  grocery  business  at  762  Main  St.    He  wishes 

to  know  that  the  merchandise  inventory  submitted  to  him  by  the  present 
owner  is  correct  and  asks  you  to  verify  it.  How  would  you  proceed  in  making 
the  verification?  Why  is  it  necessary  to  know  the  value  of  the  merchandise 
in  stock  before  ascertaining  the  profit  or  loss  for  a  fiscal  period? 

6.  If  you  were  the  bookkeeper  for  a  business  engaged  in  the  sale  of  Victrolas  and 

Victrola  records,  could  you  devise  a  plan  whereby  a  record  could  be  kept 
of  each  article  purchased  and  sold? 

7.  If  such  a  plan  were  effected,  would  the  number  of  units  of  each  kind  on  hand, 

as  shown  by  the  record,  be  equal  to  the  number  of  units  in  stock,  as  shown 
by  actual  count,  at  the  close  of  the  fiscal  period? 

8.  Name  some  conditions  that  might  cause  a  discrepancy  between  the  record 

and  the  actual  stock  on  hand. 

9.  If  merchandise  which   cost  $800.00   is  inventoried   at  $600.00,   the   present 

market  price,  what  effect  will  this  have  on  the  net  profit  for  the  period? 

10.  If  merchandise  is  inventoried  at  present  market  value  when  this  is  less  than 

the  cost  value,  why  is  it  not  inventoried  at  present  market  value  when  this 
is  greater  than  the  cost? 

11.  Can  you  name  a  condition  under  which  it  would  be  advisable  to  use  the 

present  market  value  even  though  this  should  be  greater  than  the  cost? 

12.  What  information  does  the  owner  of  a  business  obtain  from  the  Balance  Sheet 

that  he  can  not  obtain  from  the  accounts  in  the  ledger? 

13.  What  information  does  the  owner  of  a  business  obtain  from  the  Statement  of 

Profit  and  Loss  which  he  can  not  obtain  from  the  accounts  in  the  ledger? 

14.  Why  is  "Cash"  listed  first  on  the  Balance  Sheet? 

15.  How  does  the  owner  of  a  business  expect  to  pay  its  liabilities? 

16.  Name  two  forms  in  which  the  Balance  Sheet  may  be  prepared. 

17.  Which  is  considered  the  better  of  the  two  forms?    State  reasons  for  answer. 

18.  If  the  Sales  account  shows  a  debit  of  $1,500.00  and  a  credit  of  $6,000.00, 

what  does  this  indicate? 

19.  If  the  net  returns  from  sales  are  $4,565.50  and  the  expense  of  operating  the 

business  is  $4,375.00,  what  does  this  indicate? 

20.  If  the  total  assets  are  $7,682.50  and  the  total  liabilities  $6,552.90,  what  does 

this  indicate? 

21.  If  the  total  assets  are  $10,500.00  and  the  total  liabilities  $1,500.00,  what  does 

this  indicate? 

22.  Would  it  be  practicable  for  a  department  store  to  make  a  Balance  Sheet  and 

Statement  of  Profit  and  Loss  at  the  close  of  each  month?     Why? 

23.  Why  is  it  necessary  for  each  business  concern  in  the  United  States  to  have  a 

Balance  Sheet  and  a  Statement  of  Profit  and  Loss  prepared  at  least  once  each 
year? 

24.  What  information  can  the  owner  obtain  from  his  Balance  Sheet  which  will  be  of 

assistance  to  him  in  securing  credit  from  other  business  concerns? 

25.  Why  is  it  that  the  difference  between  the  total  assets  and  total  liabilities  equals 

the  net  investment  plus  the  net  profit? 


Chapter  VIII 

CLOSING  THE  LEDGER 

The  Purpose  of  this  Chapter  is  to  explain  and  illustrate  the  process' of 
closing  the  ledger  at  the  end  of  a  fiscal  period.  It  is  customary  to  close  the  ledger 
at  the  end  of  a  fiscal  period  in  order  that  the  profit  or  loss  resulting  from  the  oper- 
ations of  the  business  during  the  period  may  be  credited  or  debited  to  the  owner's 
account,  and  in  order  that  the  income  and  cost  accounts  may  be  in  balance  at 
the  beginning  of  the  next  period.  The  illustrations  are  applicable  to  the  business 
of  W.  A.  Gordon  in  the  Model  Set,  Chapter  VI. 

§  53.  Closing  the  Ledger  is  an  accounting  term  applied  to  the  process  of 
transferring  the  net  profit  or  net  loss  to  the  owner's  Capital  account  at  the  close 
of  a  fiscal  period.  This  process  requires  the  closing  of  all  income  and  cost  accounts 
which  appear  on  the  Statement  of  Profit  and  Loss.  As  explained  in  §  34,  the 
owner's  interest  in  the  business  consists  of  the  assets  invested  at  the  beginning 
of  the  business,  subsequent  investments,  and  the  net  profit  resulting  from  the 
operations  of  the  business,  less  withdrawals  from  the  investment,  and  the  net  loss, 
if  the  business  has  been  operated  at  a  loss.  The  debits  and  credits  to  the  owner's 
Capital  account  will  show  the  investments  and  withdrawals,  but  will  not  show 
the  profit  or  loss  resulting  from  the  operations  of  the  business  until  the  ledger  has 
been  closed.  For  this  reason,  it  is  customary  for  the  bookkeeper  or  accountant  to 
close  all  accounts  shown  on  the  Statement  of  Profit  and  Loss  at  the  close  of  a  fiscal 
period  and  to  debit  or  credit  the  owner's  Capital  account  with  the  loss  or  profit 
reported  to  the  owner  on  the  Statement  of  Profit  and  Loss. 

§  54.  Accounts  Required  in  Closing  the  Ledger.  Two  accounts  in 
addition  to  those  discussed  in  the  preceding  chapters  are  required  in  closing  the 
ledger:  one  to  show  the  value  of  the  merchandise  inventory  and  the  other  to  show 
the  operating  cost,  special  losses,  gross  profit  on  sales,  special  profits,  and  net  profit; 
the  former  account  is  usually  given  the  title  "Inventory"  or  "Merchandise  Inven- 
tory," and  the  latter,  "Profit  and  Loss."  Other  accounts  may  be  required;  these 
will  be  explained  and  illustrated  as  they  are  needed  in  connection  with  the  dis- 
cussion of  the  adjusting  and  closing  entries. 

INVENTORY  ACCOUNT 

§  55.  The  Purpose  of  this  Account  is  to  show  the  value  of  the  merchan- 
dise on  hand  at  the  close  of  the  fiscal  period  as  indicated  by  the  merchandise  in- 
ventory. It  is  necessary  to  show  the  value  of  the  inventory  in  an  account  in  the 
ledger  because  it  is  shown  as  one  of  the  assets  on  the  Balance  Sheet. 

Debit  the  Inventory  Account:  Credit  the  Inventory  Account: 

^  I.     At     the     close    of    each     fiscal  ^  2.     At    the    beginning    or    close    of 

period,  with  the  value  of  the  each    fiscal    period,    with    the 

merchandise  inventory  at  the  value  of  the  merchandise  in- 

close  of   the   period.  ventory   at   the   close   of   the 

preceding  fiscal  period  as  in- 
dicated by  the  entry  on  the 
debit  side. 
H  3.     The  Balance  of  this  Account  shows  the  value  of  the  merchandise  in- 
ventory at  the  close  of  the  fiscal  period. 

87 


88  CLOSING  THE  LEDGER. 

PROFIT  AND  LOSS  ACCOUNT 

§  56.  The  Purpose  of  this  Account  is  to  show  the  operating  cost,  special 
losses,  principal  income,  and  special  profits  for  the  fiscal  period  as  shown  by  the 
Statement  of  Profit  and  Loss.  No  transactions  are  recorded  in  this  account,  the 
debits  and  credits  being  formed  by  transferring  to  it  the  balances  of  the  profit 
and  loss  accounts  shown  on  the  Statement  of  Profit  and  Loss.  If  desired,  the 
balances  of  these  accounts  could  be  closed  direct  into  the  owner's  Capital  account, 
but  it  is  considered  the  better  practice  to  have  one  account  in  the  ledger  which 
summarizes  the  facts  shown  on  the  Statement  of  Profit  and  Loss.  This  account 
is  opened  only  at  the  close  of  the  fiscal  period,  and  when  the  balances  of  all  the 
profit  and  loss  accounts  have  been  transferred  to  it  and  its  balance  transferred 
to  the  owner's  Capital  account,  it  is  ruled  and  remains  in  balance  until  the  close 
of  the  next  fiscal  period. 

Direct  profits  or  losses  that  occur  during  the  fiscal  period  should  not  be  credited  or  debited  to 
the  Profit  and  Loss  account,  but  to  a  special  account,  the  name  of  which  should  indicate  the  nature 
of  the  profit  or  loss,  as  "Profit  on  Sales  of  Real  Estate,"  "Loss  on  Stolen  Typewriter,"  "Loss  on 
Delivery  Truck,"  etc. 

Debit  the  Profit  and  Loss  Account:  Credit  the  Profit  and  Loss  Account: 

%  I.     At  the  close  of  each  fiscal  period,  ^  3.     At  the  close  of  each  fiscal  period, 

with  the  balance  of  the  Ex-  with  the  gross  profit  on  sales. 

pense  account  or  accounts.  T[  4.     At  the  close  of  each  fiscal  period, 

^2.     At  the  close  of  each  fiscal  period,  with  the  balance  of  each  ac- 

with  the  balance  of  each  ac-  count  which  shows  a  profit. 

count  which  shows  a  loss. 

^  5.  The  Balance  of  the  Profit  and  Loss  Account  shows  the  net  profit  or  net 
loss  for  the  fiscal  period,  which  is  the  same  as  the  "Net  Profit"  or  "Net  Loss"  shown 
on  the  Statement  of  Profit  and  Loss.  This  balance  is  debited  or  credited  to 
the  owner's  Capital  account. 

The  student  may  wonder  why  the  account  is  not  named  "Loss  and  Profit,"  or  "Loss  and  Gain," 
because  the  losses  are  recorded  on  the  debit  side  and  the  gains  or  profits  on  the  credit  side.  The 
title  "Profit  and  Loss"  is  not  arbitrary,  and  "Loss  and  Gain"  may  be  used  if  desired.  However, 
the  title  "Profit  and  Loss"  is  preferred  by  accountants  because  the  account  is  a  summary  of  those 
accounts  used  in  connection  with  the  preparation  of  the  Statement  of  Profit  and  Loss. 

CLOSING  ENTRIES 

§  57.  Entries  to  Close  the  Ledger.  Five  or  more  entries  are  necessary  to 
close  the  ledger  as  follows:  (i)  to  record  the  merchandise  inventory  at  the  close 
of  the  fiscal  period;  (2)  to  close  the  Purchases  account;  (3)  to  close  the  Sales 
account;  (4)  to  close  the  Expense  account;  (5)  to  close  the  Profit  and  Loss  account. 
A  separate  entry  is  required  to  close  each  account  which  shows  an  income  or  a  cost, 
hence  the  number  of  entries  will  depend  on  the  number  of  accounts  to  be  closed. 
The  information  for  these  entries  is  obtained  from  the  Statement  of  Profit  and 
Lo.ss,  hence  this  statement  is  used  as  a  guide  in  closing  the  ledger. 

The  first  entry  may  be  regarded  as  an  adjusting  entry  required  to  show  in  the  ledger  the 
value  of  an  asset  used  in  the  preparation  of  the  Balance  Sheet,  or  as  one  of  the  entries  necessary  in 
the  process  of  closing  the  ledger.     (§  46,  Hlf  4  and  5.) 

§  58.  Methods  of  Closing  the  Ledger.  The  five  or  more  closing  entries 
are  of  the  same  nature  as  entries  for  transactions  which  occur  in  the  regular  oper- 
ations of  the  business  in  that  each  entry  requires  an  account  debited  and  an  ac- 
count credited,  the  values  being  the  same.  These  entries  may  be  made  direct  in 
the  ledger  accounts  or  in  the  general  journal  and  posted  to  the  ledger  in  the  same 
manner  as  transactions.    When  entries  are  made  in  the  general  journal  and  posted 


METHODS  OF  CLOSING  THE  LEDGER.  89 

to  the  ledger,  the  process  is  known  as  the  "journal  entry  method"  of  closing  the 
ledger;  when  the  adjusting  entries  are  made  direct  in  the  ledger,  the  process  of 
closing  is  referred  to  as  the  "direct  method"  of  closing  the  ledger.  Both  methods 
of  closing  the  ledger  will  be  discussed  and  illustrated  to  emphasize  the  fact  that 
the  final  results  are  the  same  no  matter  which  method  is  used. 

The  student  might  conclude  from  the  foregoing  discussion  that  the  direct  method  of  closing 
is  used  when  the  transactions  are  recorded  direct  in  the  ledger,  and  the  journal  entry  method  of 
closing  when  the  transactions  are  recorded  in  books  of  original  entry  and  posted  to  the  ledger.  How- 
ever, this  is  not  true  in  practice,  because  many  bookkeepers  prefer  the  direct  method  of  closing 
even  though  the  transactions  are  recorded  in  books  of  original  entry  and  posted.  It  is  quite  evident 
that  the  journal  entry  method  is  the  better  because  it  facilitates  auditing  by  providing  a  record  of 
the  closing  entries  in  a  book  of  original  entry. 

§  59.  Journal  Entry  Method.  When  the  closing  entries  are  made  in  the 
journal,  they  are  recorded  in  the  same  manner  as  those  necessary  to  record  trans- 
actions. All  the  entries  are  made  under  date  of  the  last  day  of  the  fiscal  period. 
The  five  journal  entries  required  to  close  the  ledger  of  W.  A.  Gordon  (Model  Set) 
on  pages  70-73  are  shown  in  the  illustration  on  page  90.  The  posting  of  these 
closing  entries  is  shown  in  the  illustration  on  pages  91  and  92;  pages  70  and  71 
are  not  repeated  because  none  of  the  accounts  on  these  two  pages  are  atTected  by 
the  closing  entries.    An  analysis  of  the  closing  entries  is  given  on  pages  94, 95  and  96. 

§  60.  Direct  Method  of  Closing.  When  the  closing  entries  are  made  direct 
in  the  ledger  and  not  in  the  journal,  they  are  recorded  in  the  same  manner  as 
transactions  (§§  19,  29  and  35),  except  it  is  customary  to  use  red  ink  in  the  entry 
which  balances  an  account.  The  ledger  page  is  given  in  each  entry  for  reference. 
The  entries  are  made  under  date  of  the  last  day  of  the  fiscal  period.  The  process 
of  closing  the  ledger  of  W^  A.  Gordon  (Model  Set)  on  pages  70-73  by  the  direct 
method  is  explained  and  illustrated  in  Appendix  B. 

The  direct  method  of  closing  is  illustrated  in  Appendix  B,  separate  from  the  journal  entry 
method  in  this  chapter  to  avoid  confusion.  The  student  should  compare  the  two  methods  because 
a  knowledge  of  both  is  necessary  to  a  thorough  understanding  of  each.  The  final  results  are  the 
same  with  either  method,  but  preference  is  given  to  the  journal  entry  method  in  this  text  because 
it  is  preferred  and  recommended  by  practicing  accountants.  The  reason  for  this  preference  is 
that  the  entries  in  the  journal  facilitate  auditing  Before  auditing  a  ledger  which  has  been  closed 
by  the  direct  method,  it  is  necessary  for  the  auditor  to  prepare  journal  entries  so  that  he  may  know 
that  each  entry  has  been  posted. 

§  61.  Balancing  an  Account.  When  it  is  desired  to  rule  an  account 
which  does  not  balance  and  carry  the  balance  down  below  the  ruling  on  the  same 
page  or  forward  it  to  a  new  page,  the  process  is  referred  to  as  balancing  an  account. 
This  is  effected  by  entering  the  balance  on  the  smaller  side  under  the  date  on  which 
the  account  is  balanced  and  ruling  the  account.  It  is  customary  to  use  red  ink  for 
the  date,  figures  and  the  ruling,  but  its  use  is  not  arbitrary.  The  balance  is  brought 
down  with  black  ink  on  the  opposite  side  of  the  account  below  the  ruling  or  under 
the  title  of  the  account  on  a  new  page.  The  method  of  balancing  the  Cash  account 
is  shown  on  page  70  and  the  proprietor's  Capital  account  on  page  91. 

§  62.  A  Post-Closing  Trial  Balance  is  a  list  of  the  open  accounts  in  the 
ledger  with  the  balance  set  opposite  the  name  of  each  account,  prepared  after 
all  the  adjusting  and  closing  entries  have  been  made  in  the  accounts.  The  facts 
shown  on  this  Trial  Balance  are  the  same  as  those  shown  on  the  Balance  Sheet 
and  should  be  checked  with  it  before  the  Balance  Sheet  is  submitted  to  the  owner 
for  his  approval.  This  Trial  Balance  is  necessary  in  order  that  the  bookkeeper  may 
know  that  the  accounts  in  the  ledger  agree  with  the  facts  shown  on  the  Balance 
Sheet,  and  that  the  ledger  is  in  balance  before  the  transactions  performed  in  the 
next  fiscal  period  are  recorded. 


90 


JOURNAL  ENTRIES  TO  CLOSE  THE  LEDGER 


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Illustration  No.  43,  Page  2  of  the  General  Journal  for  Model  Set. 

EXPLANATION.  This  illustration  shows  the  five  entries  (§  57)  to  close  the  ledger  for  W. 
A  Gordon  Model  Set,  made  in  journal  form  (§  59).  The  information  is  obtamed  from  the  State- 
ment of  Profit  and  Loss,  Illustration  No.  42.  These  entries  are  analyzed  and  further  explamed  on 
pages  94,  95  and  96. 


CLOSING  ENTRIES  POSTED 


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Illustration  No.  44,  Page  3  of  the  Ledger  for  Model  Set. 

EXPLANATION.  This  page  is  the  same  as  page  72  except  the  Capital  account  has  been 
credited  with  the  net  profit  and  is  balanced  as  explained  on  page  93.  Pages  70  and  71  are  not 
repeated  here  because  they  are  not  affected  by  the  closing  entries. 


92 


CLOSING  ENTRIES  POSTED 


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EXPLANATION.  This  page  is  the  same  as  page  73  except  the  journal  entries  on  page  90 
have  been  posted  and  the  accounts  "in  balance"  have  been  footed  and  ruled.  Pages  72  and  73  would 
appear  the  same  as  pages  91  and  92  if  the  closing  entries  had  been  posted  to  them. 


POST-CLOSING  TRIAL  BALANCE. 


93 


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Illustration  No.  46,  Profit  and  Loss  Account,  Model  Set 

The  above  account  would  be  opened  on  page  5  of  the  ledger  for  the  Model  Set,  the  first  four 
pages  being  full  as  shown  on  pages  70,  71,  91  and  92.  This  account  is  the  result  of  closing  the  Pur- 
chases, Sales  and  Expense  accounts;  the  balance  has  been  transferred  to  W.  A.  Gordon,  Capital, 
as  shown  in  the  illustration  at  the  bottom  of  page  91. 


BALANCING  THE  CAPITAL  ACCOUNT 

If  desired,  the  owner's  Capital  account  may  be  ruled  and  his  present  capital  (proprietary 
interest  in  the  business)  carried  down  under  date  of  the  beginning  of  the  next  fiscal  period.  If  this 
plan  is  followed,  the  present  capital  is  entered  on  the  debit  side  with  red  ink,  and  the  balance  carried 
down  on  the  credit  side  under  date  of  the  beginning  of  the  next  fiscal  period  as  in  the  illustration 
at  the  bottom  of  page  91. 

POST-CLOSING  TRIAL  BALANCE 


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Illustration  No.  47,  Post-Closing  Trial  Balance  for  Model  Set 

This  Trial  Balance  is  made  from  the  ledger  accounts  on  pages  70^  71,  91  and  92;  the  Accounts 
Receivable  and  Accounts  Payable  are  each  shown  in  one  amount  because  these  were  not  affected 
by  the  clo^ng  entries.  The  accounts  are  arranged  in  the  same  order  as  the  accounts  appear  in  the 
ledger.  The  facts  on  this  Trial  Balance  are  the  same  as  (hose  shown  by  the  Balance  Sheet.  The 
post-closing  Trial  Balance  proves  that  the  ledger  is  in  balance  after  the  closing  entries  are  posted. 

Combined  Journal  Entry 

If  desired,  the  accounts  used  in  making  the  Statement  of  Profit  and  Loss  may  be  closed  with 
their  balances  by  a  combined  journal  entry.  The  journal  entry  at  the  right  shows  this  method  of 
closing  the  accounts  which 
were  closed  by  the  five  sep- 
arate entries  on  page  90. 
This  form  of  closing  is  not 
recommended  by  account- 
ants because  the  Profit  and  | 
Loss  account  is  omitted. 
It  is  desirable  to  have  in  the 
ledger  a  summary  of  all  the  accounts  showing  a  profit  or  loss  such  as  that  provided  by  the  Profit 
and  Loss  account,  because  this  information  is  very  valuable  for  statistical  purposes.  The  student 
will  understand  this  better  after  he  is  more  familiar  with  the  accounting  procedure  developed  later 
in  the  course. 


Inventory 
Sales 

Purchases 

H77 
234S 

65 

3112 

50 

Expense 

W.  A.  Gordon,  Capital 

327 
3S5 

40 
90 

94 


ANALYSIS  OF  CLOSING  ENTRIES. 


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ANALYSIS  OF  CLOSING  ENTRIES  ON  PAGE  90 

The  First  Entry  is  that  required  to  record  the  merchandise  inventory  at  the  close  of 
period.     This  entry  is  necessary  because  the  cost  of  sales  is  ascertained  on  the  Statement 
and  Loss  by  subtracting  the 
inventory  at  the  close  of  the  ^^..^t'-c^X^^f..^^-,;.^^ 

fiscal    period    from    the    net      . 

purchases.  The  Inventory 
account  is  debited  to  record 
the  asset;  the  Purchases  ac- 
count is  credited  for  the  in- 
ventory so  that  when  it  is 
posted,  the  subtraction  will 
be  indicated.  It  is  custom- 
ary to  write  "Mdse.  Inv." 
in  the  explanation  column 
of  the  Inventory  account, 
and  "Inventory"  in  the  ex- 
planation column  of  the 
Purchases  account. 

The  illustration  at  the 
right  shows  the  Purchases 
account  at  the  close  of  the 
fiscal  period,  the  journal 
entry  to  record  the  inven- 
tory at  the  close  of  the  period, 
and  the  Inventory  and  Pur- 
chases accounts  as  they  ap- 
pear after  the  journal  entry 
has  been  posted. 

The  Second  Entry  is 

the  Sales  account.  This  entry 
of  Profit  and  Loss  by  sub- 
tracting the  cost  of  mer- 
chandise sold  from  the  net 
sales.  The  Sales  account  is 
debited  for  the  cost  of  sales 
so  that  when  it  is  posted, 
the  subtraction  will  be  indi- 
cated; Purchases  is  credited 
because  this  account  shows 
the  cost  of  sales.  When  this 
entry  is  posted,  the  Pur- 
chases account  will  balance 
and  be  ruled,  and  the  bal- 
ance of  the  Sales  account 
will  show  the  net  profit  on 
sales  as  shown  by  the  State- 
ment of  Profit  and  Loss.  It 
is  customary  to  write  "Cost 
of  Sales"  in  the  explanation 
column  of  each  of  these 
accounts. 

The  illustration  at  the 
right  shows  the  Sales  and 
Purchases  accounts  before 
the  second  entry  has  been 
posted,  the  journal  entry  to 
close  the  Purchases  account 
into  the  Sales  account,  and 
the  Sales  and  Purchases  ac- 
counts after  this  journal 
entry  has  been  posted.  The 
balance  of  the  Sales  account 
now  shows  the  net  profit 
made  by  selling  merchandise 
because  the  credit  side  shows 
sales  and  the  debit  side  cost. 


the  fiscal 
of  Profit 


>;»■  £  o 


^77 


V7 


that   required  to  transfer  the  balance  of  the  Purchases  account  to 
is  necessary  because  the  profit  on  sales  is  ascertained  on  the  Statement 


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ANALYSIS  OF  CLOSING  ENTRIES. 


95 


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The  Third  Entry  is  that  required  to  transfer  the  balance  of  the  Sales  account  to  the  Profit 
and  Loss  account.  This  entry  is  necessary  because  it  is  customary  to  show  in  the  ledger  a  summary 
of   the   facts   shown   by   the 

Statement  of  Profit  and  Loss  ^^iAt-^Z^L,^^  ^  

Sales  is  debited  because  this 
account  shows  the  profit 
on  sales;  the  Profit  and  Loss 
account  is  credited  because 
this  account  is  credited  for 
all  income.  When  this  entry 
is  posted,  the  Sales  account 
will  balance  and  be  ruled,  and 
the  Profit  and  Loss  account 
will  show  the  profit  on  sales. 
It  is  customary  to  write 
"Profit  on  Sales"  in  the 
explanation  column  of  each 
of  these  accounts. 

The  illustration  at  the 
right  shows  the  Sales  ac- 
count before  the  third  entry 
has  been  posted,  the  journal 
entry  to  close  the  Sales  ac- 
count into  the  Profit  and  Loss 
account,  and  the  Sales  and 
Profit  and  Loss  accounts 
after  this  journal  entry  has 
been  posted.  The  profits  and 
losses  could  be  closed  direct 
into  the  proprietor's  account 
instead  of  Profit  and  Loss 
as    explained    in    §  56. 


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The  Fourth  Entry  is  that  required  to  transfer  the  balance  of  the  Expense  account  to  the  Profit 
and  Loss  account.  This  entry  is  necessary  because  the  net  profit  is  ascertained  on  the  Statement  of 
Profit  and  Loss  by  subtrac- 
ting the  expense  from  the 
profit  on  sales.  The  Profit 
and  Loss  account  is  debited 
so  that  when  it  is  posted,  the 
subtraction  will  be  indicated; 
the  Expense  account  is  cred- 
ited because  this  account 
shows  the  expense  for  the 
period.  When  this  entry  is 
posted,  the  Expense  account 
will  balance  and  be  ruled,  and 
the  balance  of  the  Profit  and 
Loss  account  will  show  the 
net  profit.  It  is  customary 
to  write  "Profit  and  Loss" 
in  the  explanation  column  of 
the  Expense  account,  and 
"Expense"  in  the  explana- 
tion column  of  the  Profit 
and  Loss  account. 

The  illustration  at  the 
right  shows  the  Profit  and 
Loss  and  the  Expense  ac- 
counts before  the  fourth 
entry  has  been  posted,  the 
journal  entry  to  close  the 
Expense  account  into  the 
Profit  and  Loss  account,  and 
the  Profit  and  Loss  and  the 
Expense  accounts  after  this 
entry  has  been  posted. 


a^. 


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96 


ANALYSIS  OF  CLOSING  ENTRIES. 


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O-o^.   1^/ 


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^  fs^'fa 


y. 


The  Fifth  Entry  is  that  required  to  transfer  the  balance  of  the  Profit  and  Loss  account  to  the 
proprietor's  Capital  account.  This  entry  is  necessary  because  the  purpose  of  closing  the  ledger  is  to 
transfer  the  net  profit  to  _the  ^_,  .  ^ 


proprietor's  account.  The 
Profit  and  Loss  account  is 
debited  because  this  account 
shows  the  net  profit;  the 
proprietor's  Capital  account 
is  credited  because  this  profit 
is  equivalent  to  an  additional 
investment.  When  this  entry 
is  posted,  the  Profit  and  Loss 
account  will  balance  and  be 
ruled,  and  the  proprietor's 
Capital  account  will  show 
his  present  proprietorship  as 
shown  by  the  Balance  Sheet. 
It  is  customary  to  write  the 
name  of  the  proprietor's 
Capital  account  in  the  ex- 
planation column  of  the 
Profit  and  Loss  account,  and 
"Profit  and  Loss"  in  the  ex- 
planation column  of  the 
proprietor's  account. 

The  illustration  at  the 
right  shows  the  Profit  and 
Loss  account  and  the  account 
with  W.  A.  Gordon,  Capital, 
before  the  fifth  entry  has 
been  posted,  the  journal 
entry  to  close  the  Profit  and 
Loss  account,  and  the  Profit 
and  Loss  and  W.  A.  Gordon 
Capital  accounts  after  this 
entry   has   been   posted. 

If  desired,  the  proprietor's 
Capital  account  may  be  bal- 
anced and  ruled  as  explained 
on  page  93  and  illustrated  at  the  bottom  of  page  91;   this  plan  is  usually  followed. 


y^<i:^j.^^<«i^^  (^^<ijoZ- 


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l>-o  a  I 

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t^^--^^/ 


Closing  the  Inventory  Account 

If  desired,  the  inventory  of  merchandise  at  the  close  of  the  fiscal  period  may  be  transferred 
to  the  Purchases  account  at  the  beginning  of  the  next  fiscal  period.  If  it  is  not  transferred  to  the 
Purchases   account    at    the   beginning   of   the 


JVoi>.  J.  J02 


Purchases 

hiventory 
To  close  the  Inventory 

account  at  beginning 

of  fiscal  period 


H77 


15 


U77 


15 


period,  then  it  will  be  necessary  to  trans- 
fer it  to  this  account  at  the  close  of  the  period 
because  the  cost  of  merchandise  on  hand  at 
the  beginning  of  the  period  must  be  added 
to  the  cost  of  merchandise  purchased  during 
the  period  to  ascertain  the  total  cost  of 
all  merchandise.  The  form  of  entry  for 
transferring     the    merchandise    inventory    to 

the    Purchases  account   is  the   same  whether  _ 

it  is  made  at  the  beginning  or  the  close  of  the  period.  The  entry  necessary  to  transfer  the  mventory 
to  the  Purchases  account  for  W.  A.  Gordon,  Model  Set,  is  shown  at  the  right.  The  date,  November 
I,  at  the  top,  indicates  that  this  entry  was  made  at  the  beginning  of  the  next  fiscal  period.  After 
this  is  posted,  the  Inventory  account  will  be  in  balance,  and  the  value  of  the  inventory  will  appear 
on  the  debit  side  of  the  Purchases  account  under  date  of  November  i ;  it  is  customary  to  write 
"Inventory"  in  the  explanation  column  of  the  ledger. 


Exercise  No.  37,  Closing  the  Ledger,  Journal  Entry  Method. 

Prepare  a  Balance  Sheet  and  Statement  of  Profit  and  Loss,  each  in  report 
form,  from  the  Trial  Balance  of  C.  U.  Steele,  resulting  from  recording  the  trans- 


SUMMARY— CHAPTERS  VI,  VII  AND  VIII  97 

actions  in  Exercises  Nos.  17,  20  and  23  (merchandise  inventory,  $6,127.50).     Close 
the  ledger  by  the  journal  entry  method  and   take  a  post-closing  Trial    Balance. 

The  student  was  instructed  to  retain  the  Trial  Balance  and  ledger  sheets  at  the  conclusion 
of  Exercise  No.  23. 

Exercise  No.  38,  Closing  the  Ledger,  Direct  Method. 

Prepare  a  Balance  Sheet  in  account  form  and  a  Statement  of  Profit  and 
Loss  in  report  form  from  the  Trial  Balance  of  Donald  D.  Sells,  resulting  from 
recording  the  transactions  in  Exercise  No.  24  (merchandise  inventory,  $762. 78). 
Close  the  ledger  by  the  direct  method,  and  take  a   post-closing  Trial    Balance. 

The  student  was  instructed  to  retain  the  Trial  Balance  and  ledger  at  the  conclusion  of  Exer- 
cise No.  24. 

Exercise  No.  39,  Closing  the  Ledger,  Journal  Entry  Method. 

Prepare  a  Balance  Sheet  in  account  form  and  a  Statement  of  Profit  and  Loss 
in  report  form  from  the  Trial  Balance  of  H.  A.  Popp,  resulting  from  recording 
the  transactions  in  Exercise  No.  25  (merchandise  inventory,  $396.54).  Close  the 
ledger  by  the  journal  entry  method,  and  take  a  post-closing  Trial  Balance. 

The  student  was  instructed  to  retain  the  Trial  Balance  and  ledger  at  the  conclusion  of  Exer- 
cise No.  25. 

Exercise  No.  40,  Closing  the  Ledger,  Combined  Journal  Entry. 

Prepare  a  Balance  Sheet  and  Statement  of  Profit  and  Loss,  each  in  report 
form,  from  the  Trial  Balance  of  J.  N.  Fulton,  resulting  from  recording  the  trans- 
actions in  Exercise  No.  26.  Close  the  ledger  by  a  combined  journal  entry  as  ex- 
plained at  the  bottom  of  page  93,  and  take  a  post-closing  Trial  Balance. 

The  student  was  instructed  to  retain  the  Trial  Balance  and  ledger  at  the  conclusion  of  Exer- 
cise  No.   26. 

Summary  of  Chapters  VI,  VII  and  VIII.  The  Model  Set  in  Chapter  VI 
illustrates  the  method  of  recording  transactions,  posting  and  taking  a  Trial  Balance. 
Illustrations  are  provided  so  that  the  student  may  see  the  connection  between  the 
transactions  and  the  Trial  Balance  at  the  end  of  the  month. 

The  Balance  Sheet  is  a  report  showing  the  assets,  liabilities  and  proprietor- 
ship. The  Statement  of  Profit  and  Loss  is  a  report  showing  a  list  of  the  income, 
costs  and  net  profit.  The  proprietorship  as  shown  by  the  Balance  Sheet  less  the 
net  profit  or  plus  the  net  loss  as  shown  by  the  Statement  of  Profit  and  Loss  equals 
the  proprietorship  at  the  beginning  of  the  fiscal  period. 

"Closing  the  ledger"  is  a  term  used  to  describe  the  method  of  transferring 
the  profit  or  loss  to  the  owner's  Capital  account.  Certain  entries  are  required  to 
make  this  transfer.  These  entries  may  be  made  direct  in  the  ledger  in  the  same 
manner  as  transactions  may  be  recorded  direct  in  the  ledger,  or  they  may  be  re- 
corded in  the  general  journal  and  posted  to  the  ledger.  The  accounts  to  be  closed 
are  those  used  in  connection  with  the  Statement  of  Profit  and  Loss;  they  include 
cost  and  income  accounts.  The  Profit  and  Loss  account  is  used  in  the  process  of 
closing;  when  all  accounts  have  been  closed,  the  balance  of  the  Profit  and  Loss 
account  is  transferred  to  the  owner's  Capital  account.  The  post-closing  Trial 
Balance  proves  that  the  equality  of  debits  and  credits  has  been  maintained 
throughout  the  closing  process. 

QUESTIONS 

1.  Explain  the  meaning  of  the  term  "closing  the  ledger." 

2.  Is  it  necessary  to  close  the  ledger?     Why? 

3.  When  is  the  ledger  closed? 

4.  Name  the  two  methods  of  closing  the  ledger. 


98  QUESTIONS  ON  CLOSING  THE  LEDGER 

5.  What  is  the  purpose  of  the  Profit  and  Loss  account? 

6.  Why  is  the  account  not  named  "Loss  and  Gain"  since  losses  appear  on  the 

debit  side  and  gains  on  the  credit  side? 
What  is  the  purpose  of  the  post-closing  Trial  Balance? 
Why  are  accounts  ruled  when  the  two  sides  are  equal?     How? 
Why  is  it  necessary  to  open  an  account  with  Inventory  at  the  close  of  the 

fiscal  period? 

10.  Name  the  five  entries  usually  required  in  connection  with  closing  the  ledger. 

11.  If  the  business  had  made  a  profit  other  than  that  shown  by  the  Purchases, 

Sales  and  Inventory  accounts,  would  a  separate  entry  be  required  to  close 
this  profit  into  the  Profit  and  Loss  account?  If  the  profit  is  credited  to  a 
Profit  on  Sales  of  Real  Estate  account,  name  the  accounts  debited  and 
credited  in  the  closing  entry. 

12.  A  business  owned  a  horse  which  it  used  in  connection  with  the  delivery  of  its 

merchandise;  this  horse  died  and  the  loss  was  debited  to  a  "Loss  on  Dead 
Horse"  account.  Would  a  special  entry  be  required  to  close  the  balance  of 
this  account  into  the  Profit  and  Loss  account?  Name  the  accounts  debited 
and  credited  in  this  closing  entry. 

13.  After  the  ledger  is  closed,   what  accounts  remain  open? 

14.  What  relation  does  the  credit  to  the  owner's  Capital  account  after  it  is  closed 

have  to  the  assets  and  liabilities  shown  by  the  accounts  that  remain  open 
after  the  ledger  is  closed? 

15.  Describe  the  process  of  closing  the  ledger  by  the  direct  method. 

16.  Describe  the  process  of  closing  the  ledger  by  the  journal  entry  method. 

17.  Which  method  of  closing  the  ledger  is  considered  the  better?    Why? 

18.  Are  the  debits  and  credits  equal  in  each  closing  entry?    Why  is  this  necessary? 

19.  If  an  account  is  closed  with  an  incorrect  amount,  what  effect  will  this  have 

on  the  Trial  Balance  of  the  first  month  of  the  next  fiscal  period? 

20.  Mention  an  error  in  the  closing  of  the  ledger  which  would  effect  future  Trial 

Balances. 

21.  Why  is  the  Cash  account  balanced  at  the  close  of  the  fiscal  period? 

22.  Describe  the  entry  necessary  to  close  the  balance  of  the  Inventory  account 

into  the   Purchases  account.     When   should  this  entry  be  made? 

23.  Is  it  necessary  to  balance  each  customer's  account  and  each  creditor's  account 

in  the  ledger  at  the  close  of  the  fiscal  period?    Give  reasons  for  your  answer, 

24.  Is  it  necessary  to  balance  the  Capital  account  after  the  net  profit  or  net  loss 

for  the  period  has  been  credited  or  debited  to  it? 

25.  Why  is  red  ink  used  for  closing  the  Capital  account  even  though  the  other 

accounts    may    be    closed    by    journal    entries? 


Chapter  IX 

BUSINESS  FORMS  AND  VOUCHERS 

The  Purpose  of  this  and  the  two  Succeeding  Chapters  is  to  explain  and 
illustrate  those  business  forms  used  most  frequently  in  connection  with  the  per- 
formance of  business  transactions.  A  printed  statement  of  the  business  transac- 
tion which  has  been  completed  is  sufficient  for  determining  the  debits  and  credits 
in  connection  with  the  transaction,  but  a  knowledge  of  business  forms  is  necessary 
because  they  represent  transactions  to  the  bookkeeper. 

§  63.  A  Business  Form  or  Voucher  is  a  written  statement  concerning 
a  business  transaction  to  be  performed  or  one  that  has  been  completed.  The  two 
terms  are  used  with  the  same  meaning,  but  the  term  "voucher"  usually  refers  to 
a  business  form  which  is  an  evidence  of  a  cash  payment.  Business  forms  prepared 
for  a  specific  purpose  are  usually  printed  with  blank  space  for  the  information 
desired  in  connection  with  a  transaction.  These  forms  are  referred  to  by  name, 
as  purchase  order,  invoice,  purchases  invoice,  sales  invoice,  bill,  sales  ticket,  receipt, 
deposit  ticket,  check,  note,  sight  draft,  time  draft,  trade  acceptance,  etc.  The 
various  business  forms  will  be  explained  and  illustrated  as  they  are  needed  in 
the  recording  of  transactions  in  the  practice  sets.  In  this  chapter,  those  which 
relate  to  the  purchases  and  sales  of  merchandise  are  explained  and  illustrated. 

§  64.  Use  of  Business  Forms.  A  business  form  serves  two  purposes: 
(i)  it  provides  written  information  in  regard  to  a  business  transaction,  thus  avoid- 
ing the  misunderstanding  which  might  result  from  a  verbal  contract;  (2)  it  pro- 
vides information  for  the  basis  of  the  entry  made  by  the  bookkeeper  when  he  re- 
cords the  transaction.  From  the  standpoint  of  the  bookkeeper,  business  forms 
are  very  important  because  they  not  only  provide  the  information  which  he  needs 
in  recording  transactions,  but  also  support  his  records  when  these  are  verified 
by  the  auditor. 

In  the  preceding  chapters,  the  transactions  have  been  recorded  from  a  printed  statement  of 
the  facts;  in  practice,  the  bookkeeper  would  make  his  record  from  business  forms  because  no 
printed  record  of  the  transactions  would  be  available.  The  usual  process  is  (a)  transactions  performed 
as  evidenced  by  business  forms;  (b)  a  record  of  these  transactions  in  books  of  original  entry;  (c)  the 
accounts  in  the  ledger  resulting  from  posting;  (d)  the  Trial  Balance  at  the  end  of  the  month  to  prove 
the  equality  of  the  debits  and  credits;  (e)  a  report  of  the  assets  and  liabilities,  and  profits  and  losses 
to  the  owner  at  the  close  of  the  fiscal  period. 

§  65.  A  Purchase  Order,  or  "order"  as  it  is  sometimes  termed,  is  the  written 
authority  from  the  purchaser,  authorizing  the  seller  to  make  shipment  of  the  mer- 
chandise described  therein.  The  printed  form  provided  for  a  purchase  order 
should  be  made  in  duplicate,  the  original  and  duplicate  printed  on  different-colored 
paper,  and  each  original  and  duplicate  numbered  the  same,  the  numbers  being 
arranged  consecutively.  When  the  order  is  made,  the  same  facts  are  shown  on 
the  duplicate  as  on  the  original  and  the  duplicate  is  filed  for  reference.  When 
this  plan  is  followed,  the  purchaser  has  available  all  the  information  given  in  each 
order  and  can  check  the  list  of  the  merchandise  received  with  this  to  determine 
whether  the  order  has  been  filled  as  directed. 

Merchandise  may  be  ordered  by  letter,  by  telegraph,  or  by  telephone;  when  the  order  is  placed 
by  letter,  a  description  of  the  merchandise  desired  is  given  on  the  order  blank  enclosed  with  the 
letter,  and  not  in  the  letter;  when  the  merchandise  is  ordered  by  telegraph  or  by  telephone,  an 
order,  accompanied  by  the  copy  of  the  telegram  or  containing  the  date  of  the  telephone  message 
is  mailed  to  the  seller  confirming  the  telegram  or  the  telephone  call.  Unfilled  orders  should  be  filed 
numerically,  and,  when  they  have  been  filled,  they  should  be  placed  in  another  file  in  the  same  order. 
Illustration  No.  48  shows  one  form  of  purchase  order;   others  will  be  discussed  and  illustrated  later. 

99 


lOO 


BUSINESS  FORMS  AND  VOUCHERS. 


MARK  ORDER  NO 


ON  ALL  INVOICES 


SOUTH-WESTERN  PUBUSHING  CO. 

Publishers  o(  Comniercljil  Text  Books 

309  WEST  THIRD  ST.,  CINCINNATI,  OHIO 

Order  No.       3983 

..-J.^''^^\.^..?^.^®..^^-'^-^.^^°*-^.^.^"S---^°----^  Chidunati....MTiX.Zl..... ig.  ZX 

Rochester,__N._.  Y. _  Terms-  .  30  dajs.  net 

Ship  taa- freight.. -.prepaid _.._ 

MARK   ORDER   NO.   ON   OUTSIDE   OF  ALL   PACKAGES   AND   CASES 


DESCRIPTION 


PRICE  PER 


^106  Bases  ) 

3^59  Sections  ) 

#60      "  ( 

#22      "  ( 


110  finislw^ 


10. oc 

30. OC 
31.00 
33.50 


ea. 


Deliver  no  floods  without  a  wrillcn  Order  on  this  form. 


^ontl)  l^estern  ^ublialimg  Co. 

By..&QJ^7.■..M.....- -. 


Illustration  No.  48,  Purchase  Order. 

EXPLANATION.  This  illustration  shows  a  purchase  order  issued  by  the  South-Western 
Publishing  Co.,  Cincinnati,  O.,  for  filing  devices  manufactured  by  the  Yawman  &  Erbe  Mfg.  Co., 
Rochester,  N.  Y.  The  order  is  issued  in  triplicate;  the  original  is  mailed  to  the  Yawman  &  Erbe 
Mfg.  Co.,  one  copy  is  filed  in  the  office,  and  the  other  is  sent  to  the  receiving  department.  The 
instructions  in  the  upper  right  hand  corner  are  for  information  in  checking  the  invoice;  the  instruc- 
tions in  regard  to  marking  the  cases  are  for  the  receiving  department. 


§  66.  An  Invoice  is  a  written  list  of  merchandise  purchased  or  sold.  The 
purchaser  usually  refers  to  the  invoice  he  receives  as  a  "purchase  invoice,"  and 
the  seller  to  one  which  he  issues  as  a  "sales  invoice."  If  the  printed  form  on  which 
the  invoice  is  prepared  is  made  in  duplicate,  the  seller  can,  by  the  use  of  carbon 
paper,  retain  a  copy  of  the  list  of  items  sold  each  customer;  the  method  of  doing 
this  will  be  explained  later.  An  invoice  is  authorized  by  a  purchase  order  and 
should  contain  all  the  information  given  in  the  order;  this  includes  the  date  and 
number  of  the  purchase  order,  method  of  making  shipment,  detailed  description  of 
the  merchandise  shipped,  prices  and  extensions  of  each  item,  and  the  total.  In 
addition  to  this  information,  the  invoice  should  show  the  date  the  merchandise  was 
shipped,  which  should  be  the  date  of  the  invoice;  the  terms  which  the  seller  allows; 
the  name  and  address  of  the  seller;  and  any  other  information  which  the  seller 
may  wish  to  include.  If  all  the  merchandise  mentioned  in  the  purchase  order 
is  not  shipped,  an  explanation  of  this  omission  should  be  given  on  the  invoice, 
because  the  purchaser,  in  checking  the  information  on  the  invoice  with  his  order, 
will  want  to  know  the  reason  it  has  not  been  filled  as  specified.  Illustrations  Nos. 
49  and  50  show  two  forms  of  invoices;  other  forms  will  be  explained  and  illus- 
trated later. 


BUSINESS  FORMS  AND  VOUCHERS. 


lOI 


VawmanandFrbe  Mfg.Cp. 


Wood  and  Steel 

Filing  Devices 


my 


Office  Systems 

and  Equipment 


MAIN  OFFICE  AND  FACTORIES.  ROCHESTER.  N.  Y. 


Sold  To 


South  Western  Publishing  Co. 
309  West  Third  St. 
Cincinnati,    Ohio. 


Date 

Your  Order  No. 

Rochester  No. 

Branch  No. 

Shipped  Via 

Territory 


5/34/21. 
3983 

234873 

II  Y  C 
66 


TERMS:— Thirty  Days  Net— Payable  in  New  York  Eichange— Pay  No  Money  to  Representatives. 


Quantity 


2^ 

2^ 
2^ 


Description 


106  Bases 
59   Sections 
60 
22 


Price 


.\mount 


10  00 ''ea     20  00^ 

30  00^  "   120  00-^ 

31  OO''   "      62  00-/ 
33    50^    "      67  OOy' 


110  finleh 


Total 


5^869  00^ 


Illustration  No.  49,  Purchase  Invoice. 

EXPLANATION.  This  invoice  is  in  acknowledgment  of  the  purchase  order,  Illustration 
No.  48.  The  order  has  been  filled  complete.  Space  is  provided  on  the  invoice  for  information  relative 
to  the  date,  the  buyer's  order  number,  the  seller's  number,  the  branch  number,  method  of  shipment, 
and  territory.  The  "66"  after  "Territory"  indicates  that  there  are  a  number  of  territories  and  that 
the  merchandise  mentioned  in  this  invoice  was  shipped  into  territory  No.  66.  The  check  marks 
indicate  that  the  merchandise  has  been  received  as  ordered,  that  the  prices  agree  with  the  order, 
and^that  the  extensions  and  the  total  have  been  verified. 


W.  H  .  GOODWIN 


X)E^VLEIt    IN 


Fancy  Groceries, Provisions  and  Country  Produce. 


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Illustration  No.  50,  Sales  Invoice. 

EXPLANATION.  The  information  on  this  sales  invoice  is  practically  the  same  as  that  on 
the  purchase  invoice  except  it  is  rendered  by  a  retail  merchant  and  he  does  not  need  the  information 
shown  on  the  purchase  invoice. 


I02 


BUSINESS  FORMS  AND  VOUCHERS. 


§  67.  A  Sales  Ticket  is  a  form  of  sales  invoice  used  by  some  retail  mer- 
chants. Sales  tickets  are  usually  printed  in  duplicate  and  bound  in  a  book.  Each 
clerk  is  provided  with  a  book,  and,  when  he  makes  a  sale,  either  on  account  or  for 
cash,  he  makes  a  list  of  the  merchandise  sold  on  the  sales  ticket.  By  the 
use  of  carbon  paper,  the  two  copies 
can  be  made  at  one  time;  one  copy 
is  sent  to  the  office  for  the  information 
of  the  bookkeeper  and  the  other  to  the 
wrapping  department  to  be  wrapped 
with  the  merchandise  sold ;  additional 
copies  may  be  made  at  the  same  time 
if  they  are  needed  in  connection  with 
the  accounting  records.  There  are 
many  methods  of  arranging  sales 
tickets,  but  no  attempt  will  be  made 
here  to  discuss  all  of  these.  The 
method  described  will  enable  the  stu- 
dent to  understand  the  meaning  and 
purpose  of  the  sales  ticket  and  its  use 
in  connection  with  the  sales  invoice. 
Illustration  No.  51  shows  one  form  of 
sales  ticket.  The  student  is  advised  to 
inquire  from  local  merchants  for  other 
forms  and  their  use  in  the  sales,  pack- 
ing, and  accounting  departments. 

EXPLANATION.  The  information  on 
this  sales  ticket  shows  the  date,  the  name  of 
the  one  to  whom  the  sale  was  made,  his  ad- 
dress, the  number  of  the  sale,  the  clerk,  the 
items  sold,  amount  of  each,  and  total  amount. 
The  purchaser  receives  a  copy  of  this  with  the 
merchandise  so  that  he  may  know  that  the 
proper  merchandise  has  been  delivered. 

Illustration  No.  51,  Sales  Ticket. 

§  68.  A  Bill  is  a  business  form  given  as  evidence  of  service  rendered.  The 
terms  "bill"  and  "invoice"  are  sometimes  used  interchangeably,  but  the  general 
understanding  is  that  an  invoice  is  a  list  of  merchandise  or  material  purchased 


LAST  DAY  OF  PAYMENT  OCTOBER  lOth 


y 


CINCINNATI.  O      OCTOBER  1.  1921  j 

*/,fi>'/THE  Cincinnati  &  Suburban  Bell  Telephone  Co. 


CASHIERS  STUB 

PLXASE     RETURN    THIS    STUB    WITH     YOU 

MAIL     REMITTANCE    OR    PLACE    YOUR 

TELEPHONE  NUMBER  ON  CHECK 


>  OCTOBER.  1021 


JAS.    W.    BAia:R  A3874  j 

DELAWARE  &   KASOTA.  ! 

AVOU.,      CIKTl.,    0.  } 
4.60 


JAS.    W.    BAJiER 
DELA'.VAHE   &   ilASOTA, 
AVOIi.,       ClIiTl.,    0. 


1        OCTOBER.   I»21 


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ixrlDS  June.  July.  Aufl. 


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Illustration  No.  52,  A  Bill. 
EXPLANATION.  This  bill  is  rendered  for  telephone  service  as  stated  therein.  In  addition 
to  regular  service,  there  is  a  charge  for  toll  or  long-distance  calls;  this  charge  is  usually  supported 
by  a  separate  bill  giving  details.  The  notice  in  the  upper  left-hand  corner  is  for  the  convenience  of 
the  bookkeeper  of  the  telephone  company  so  that,  when  a  remittance  is  received,  he  may  know 
whether  the  subscriber  desires  the  bill  to  be  receipted  and  returned. 


BUSINESS  FORMS  AND  VOUCHERS. 


103 


or  sold,  and  a  bill  is  a  statement  of  service  rendered.  Bills  are  rendered  by  at- 
torneys, physicians,  gas,  electric,  and  telephone  companies,  and  other  individuals 
or  concerns  which  render  service  for  which  payment  is  to  be  made  after  the  ser- 
vice is  rendered.  Illustration  No.  52  shows  one  form  of  bill.  The  arrangement 
is  usually  the  same  as  that  of  an  invoice,  but  this  depends  largely  on  the  purpose 
for  which   the  bill  is  rendered. 

§  69.  A  Receipt  is  a  written  acknowledgment  from  the  receiver  to  the 
giver,  of  money  or  other  property  received  in  payment  for  some  form  of  indebted- 
ness. Receipts  may  be  the  result  of  transactions  in  connection  with  the  purchase 
or  sale  of  merchandise  or  transactions  in  which  service  has  been  rendered.  A 
receipt  may  be  written  on  a  receipt  form  as  in  Illustration  No.  53;    it  may  be  a 


No. 

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Illustration  No.  53,  Receipt  Book  with  Stub. 

EXPLANATION.  The  illustration  shows  the  receipt  book  and  stub.  The  information  on 
the  stub  is  arranged  in  the  same  order  as  it  is  on  the  receipt  for  the  convenience  of  the  bookkeeper. 
The  purpose  of  a  receipt  should  always  be  stated  on  the  stub  for  the  information  of  the  bookkeeper 
when  he  records  the  transaction  (§  27,  \  5),  and  on  the  receipt  for  the  information  of  the  holder. 


The  Philip  Carey  Compaisht 


OBDCB  NO.  D-058676 

Car  No 

F   O.  B.      DEL'D 


LOCK.LAND,  CINCINNATI.  OHIO.       DEC.     31.      192 

Req.  No  Shipped  From 

Freisht  Invoice  No. 

VI*       OUR      TRUCK  SALESMAN 


To  H.  C.  HAZEN  CONTRACTIHG  CO. 
2070  READING  ROAD, 

CINCINNATI,  0. 


LOCKLAND,  OHIO 
PLYMOUTH   MEETING.   PA. 


ALL  REMITTANCES 

rfUST  BE  MADE  PAYABLE 

TO  ORDER 

OF   THE   COMPANY 


Terms,  Cash.    Subiact  to  eight  draft  In  30  ds;s  without  further  Douoe.   Interest  cbarsed  on  paat  DUE  ACCOUNTS. 


3-PLY  GRAY  WALLBOARD  IN  BULD. 

105  SHEETS  48"  Z  6'   2520  SQ.  FT. 

SHIPPED  TO  H.  C.  HAZEN  CONTRACTING  CO.. 
2070  READING  ROAD. 

CINCINNATI.  0. 


35.00  M 


88.20 


y 


Illustration  No.  54,  Receipted  Invoice, 

EXPLANATION.     The  blue  stamp  indicates  payment.     When  an  invoice  is  receipted  this  is 
sufficient  evidence  of  payment,  hence  a  receipt  in  receipt  form  is  not  necessary. 


104 


BUSINESS  FORMS  AND  VOUCHERS. 


receipted  invoice  or  bill  as  in  Illustrations  Nos.  54  and  55;  or  it  may  be  prepared 
in  any  form  which  suits  the  convenience  of  the  giver.  Each  business  concern 
which  issues  receipts  should  have  these  bound  in  a  book  with  stubs  as  in  Illus- 
tration No.  53,  as  this  provides  a  permanent  record  of  all  receipts  issued.  When 
issuing  a  receipt  similar  to  the  illustration,  the  bookkeeper  should  always  fill 
out  the  stub  first  because  this  is  his  record  of  the  receipt. 


SEPT.  10,  1921 

SEPT.  10,  1921 

NOTICE 

No  Discount  Allowed 
on  this  Bill  after 

SEPT.  15th 

3 

J -W. BAKER 

3261    DELAWARE   AVE. 

JWB 
172-21 

3-13 

2.10 

13 

TO  THE  UNION  GAS  AND  ELECTRIC  CO.  dr. 

S.  W.  COR    FOURTH  AND  PLUM  STS.,  CINCINNATI,  O.    r\     kr\ 
For  ISatural  Gas  Consumed:                                                                     /J.rtU 

SEP      1          8  8  7  0^^ 
AUG      1            8  8  10   ^^ 

Amount  Consumed                                ^  .-.    OO 

,3U 
210 

Cu.  Ft. 

At  the  rate  of  40c   per  M  cubic   feet,   subject  to  discount 

of  5c  per  M,  if  paid  on  or  before   Last  Day  of  Discount. 

Minimum  Bill  35c  net  per  month. 

Plcaie  Bring  this  Bill  to  be  Receipted.    POSTAGE  must  be  enclosed  for  Return  of  Receipt. 
OFFICE  HOURS:    8  A.M.  to  5  P  M. .    SATURDAY  to  12  M       Closed  on  Legal  Holidays. 

Illustration  No.  55/ Receipted  Bill. 

EXPLANATION.  The  illustration  shows  a  receipted  bill  from  the  gas  company.  The  cashier 
of  the  gas  company  would  remove  the  right-hand  end  at  the  Une  and  retain  this  for  his  record.  Both 
ends  are  illustrated  to  show  that  the  stub  may  be  attached  to  the  receipt  and  not  bound  in  a  book. 

§  70.  Filing  Business  Forms  and  Vouchers.  All  business  forms  and 
vouchers  should  be  properly  filed  because  they  are  evidence  of  transactions  either 
completed  or  to  be  completed,  and,  unless  properly  filed,  might  not  be  available 
when  needed.  The  bookkeeper  should  pay  particular  attention  to  the  filing  of 
business  forms  and  vouchers  which  support  his  records  so  that  he  may  have  satis- 
factory evidence  of  their  correctness.  No  attempt  will  be  made  here  to  discuss 
the  method  of  filing  business  forms  and  vouchers,  the  purpose  of  the  discussion 
being  to  impress  on  the  student  of  bookkeeping  the  importance  of  filing  those 
business  forms  and  vouchers  which  support  the  bookkeeping  records. 

Exercise  No.  41,  Sales  Tickets. 

Prepare  sales  tickets  for  the  sales  made  July  5,  8,  13,  16,  19,  22,  and  26  in 
Exercise  No.  14  on  page  40.  You  may  use  the  sales  tickets  of  a  local  grocer,  blank 
sales  tickets,  or  forms  ruled  similar  to  Illustration  No.  51. 


Exercise  No.  42,  Sales  Invoices. 

Prepare  sales  invoices  for  the  ten  sales  in  Exercise  No.  19,  page  49.  You 
may  use  invoices  of  a  local  grocer,  blank  invoices  for  sale  by  stationery  stores, 
or  forms  ruled  similar  to  Illustration  No.  50. 


BUSINESS  FORMS  AND  VOUCHERS.  105 

Exercise  No.  43,  Purchase  Order,  Sales  Invoice,  and  Receipt. 

As  purchasing  agent  for  the  Johnson  Paint  Co.,  Chicago,  place  an  order, 
under  date  of  May  16,  with  the  Globe-Wernicke  Co.,  Cincinnati,  manufacturers 
of  office  furniture,  for  the  following:  3  No.  503  Filing  Cases  at  $12.00;  6  No.  67 
Sections  at  $32.00;  3  No.  69  Sections  at  $35  00;  12  No.  37  Sections  at  $36.25, 
Terms,  net  30  days;   shipment  to  be  made  by  Pennsylvania  freight. 

As  bill  clerk  for  the  Globe-Wernicke  Co.,  render  an  invoice  for  this  mate- 
rial under  date  of  May  19. 

As  receiving  cashier  for  the  Globe-Wernicke  Co.,  prepare  a  receipt  for  the 
remittance  received  from  the  Johnson  Paint  Co.  in  payment  for  this  invoice. 

If  you  can  obtain  an  order  blank  and  an  invoice  from  some  local  business 
concerns,  these  may  be  used  instead  of  the  names  given.  If  you  do  not  have  blank 
forms,  rule  writing  paper  similar  to  Illustrations  Nos.  48,  49,  and  53. 

QUESTIONS 

What  business  form  supports  the  record  of  each  transaction  in  the  purchases 

journal? 
What  business  form  supports  the  record  of  each   transaction  in   the  sales 

journal? 

3.  Explain  the  check  marks  in  Illustration  No.  49. 

4.  Explain  the  meaning  of  the  words  "30  days  net"  after  "Terms"  in  Illustration 

No.  48. 
Explain  the  meaning  of  the  terms  "Date,"  "Your  Order  No.,"  "Rochester 
No.,"  "Branch  No.,"  "Shipped  via,"  and  "Territory,"  and  the  informa- 
tion given  on  a  line  with  these  in  Illustration  No.  49. 

6.  What  is  the  purpose  of  indicating  the  territory  number? 

7.  Explain  "Mark  order  number  on  outside  of  all  packages  and  cases"  in  Illus- 

tration No.  48. 

8.  Explain  "Deliver  no  goods  without  a  written  order  on  this  form"  in  Illus- 

tration No.  48. 

9.  When  is  the  due  date  of  the  invoice  in  Illustration  No.  49? 

10.  Why  should  a  purchase  order  be  made  in  duplicate? 

11.  Why  should  duplicate  purchase  orders  be  filed? 

12.  Can  you  suggest  a  method  of  filing  duplicate  orders  so  that  the  informa- 

tion will  be  readily  available  when  needed? 

13.  Why  should  a  sales  invoice  be  made  in  duplicate? 

14.  Could  the  duplicate  sales  invoices  be  used  as  a  sales  journal? 

15-     Suggest  a  means  of  filing  the  duplicate  sales  invoices  if  they  are  to  be  used 
as  a  sales  journal. 

16.  Distinguish  between  a  purchases  invoice  and  a  sales  invoice. 

17.  Robert  Crouch  made  a  number  of  purchases  on  account  from  a  local  grocer 

during  the  month  of  June.  July  i  he  received  a  written  statement  from 
the  merchant,  showing  that  he  owed  the  merchant  $28.60.  How  may  Mr. 
Crouch  know  that  this  amount  is  correct  without  asking  the  merchant  for 
additional  information? 

18.  If  a  merchant  sends  a  sales  ticket  with  each  sale  on  account,  is  it  necessary 

for  him  to  render  a  sales  invoice? 

19.  If  you  purchase  a  pair  of  shoes  from  a  local  merchant  and  wish  to  return 

them,  what  evidence  will  he  require  in  addition  to  the  shoes?    Why? 


I06  BUSINESS  FORMS  AND  VOUCHERS. 

20.  Could  the  sales  tickets  be  used  by  the  merchant  as  the  account  with  a  cus- 

tomer? 

21.  Distinguish  between  a  bill  and  an  invoice. 

22.  If  a  merchant  has  a  purchase  invoice  receipted  when  he  pays  it,  is  a  receipt 

in  receipt  form  necessary? 

23.  If  a  receipt  for  $21.50  is  issued  to  a  customer  for  this  amount  of  cash  received 

from  him  on  account,  and  the  entry  on  the  stub  shows  only  $21.00,  how 
will  the  bookkeeper  detect  the  error? 

24.  If  a  receipt  is  issued  and  the  bookkeeper  fails  to  record  it  on  the  stub,  state 

two  ways  by  which  he  may  ascentain  the  amount  of  the  receipt. 

25.  If  the  bookkeeper  issues  receipts  for  all  money  received,  what  business  forms 

support  his  record  of  the  transactions  on  the  receipts  side  of  the  cash  book? 


Chapter  X 

BUSINESS  FORMS  AND  VOUCHERS— Continued 

§  71.  A  Bank  is  a  business  organized  for  the  purpose  of  making  a  profit 
through  dealing  in  money  and  securities.  The  capital  investment,  together  with 
the  money  deposited  by  customers,  is  loaned  to  those  engaged  in  other  business 
enterprises.  The  principal  income  is  the  interest  earned  by  these  loans.  Banks 
are  of  great  value  to  the  community  in  which  they  are  located  because  they  pro- 
vide a  place  for  the  safe-keeping  of  money  and  securities,  and  make  possible  the 
"deposit  and  check"  method  of  making  payments,  thus  eliminating,  to  a  great 
extent,  the  use  of  money  as  a  medium  of  exchange. 

§  72.  Opening  an  Account  with  the  Bank.  An  account  is  opened  with 
a  bank  by  depositing  currency  or  cash  items;  the  receiving  teller  will  not  accept  the 
first  deposit  from  a  depositor  until  it  has  been  approved  by  the  cashier  or  president 
of  the  bank.  It  is  necessary  for  the  officials  of  the  bank  to  become  acquainted 
with  each  depositor  so  as  to  avoid  the  possibility  of  the  use  of  the  bank  account  for 
a  fraudulent  purpose.  The  receiving  teller  gives  the  depositor  a  receipt  for  the 
amount  of  his  deposit;  this  receipt  is  in  the  form  of  an  entry  in  the  pass  book  (§  75), 
showing  the  date  of  the  deposit  and  the  amount.  The  depositor  is  provided  with 
a  book  of  blank  checks  (§  76)  for  his  use  in  withdrawing  the  money  deposited; 
these  blank  checks  are  necessary  because  no  money  can  be  withdrawn  from  the  bank 
except  by  check.  The  depositor  is  re- 
quired to  sign  his  name  on  a  signature 
card  that  the  bank  may  verify  his  sig- 
nature on  the  checks  which  he  writes. 


gVc3^/^^,  77 JL 


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EXPLANATION.  The  illustration  indi- 
cates that  T.  L.  Staples  has  opened  an  account 
with  the  Merchants  National  Bank  and  that 
his  checks  will  be  signed  as  indicated  by  his 
signature  on  the  card.  His  address,  name  of 
the  person  by  whom  identified,  telephone 
number,  and  date  of  opening  the  account  are 
given  for  future  reference.  The  card  is 
punched  to  fit  a  filing  device  in  which  it  will 
be  filed  alphabetically.  Illustration  No.  56,  Signature  Card. 

§  73.  A  Deposit  Ticket  is  a  printed  form  supplied  the  depositors  by  the 
bank,  on  which  to  list  the  currency  or  cash  items  which  he  wishes  to  deposit. 
Space  is  provided  for  the  date,  name  and  address  of  the  depositor,  the  various 
kinds  of  currency  and  cash  items  deposited,  and  the  total  amount  of  the  deposit. 
Illustration  No.  57  shows  two  deposit  tickets,  one  on  which  the  depositor  has 
listed  currency  only,  and  the  other  on  which  he  has  listed  currency  and  cash  items. 

§  74.  Method  of  Making  a  Deposit.  The  depositor  should  consult  with 
the  receiving  teller  in  regard  to  the  preparation  of  his  deposit  ticket  that  he  may 
know  the  teller's  desires  in  this  matter  and  thus  prepare  his  deposit  to  suit  the 
convenience  of  the  clerks  in  the  bank.     Currency  and  cash  items  should  be  listed 

107 


io8  BUSINESS  FORMS  AND  VOUCHERS. 

ALWAYS  BRING  YOUR  PASS  BOOK:  ALWAYS  BRING  YOUR  PASS  BOOK. 


Merchants  National  Bank 


Merchants  National  Bank 


.^M^       Pjyyyy/A^j- 


&I^ 


V,/iy       £>f7^yy/j'y^J- 


JA/_ 


^J^y.^- 


.JS)/_ 


LIST  EACH  CHECK  SINGLY. 


'SuT-renTM 

/  S-0  0 

yr 

((^4<3r>^ 

.*t 

.^/n/. 

/  fOO 

L/STEACH  CHECK  SINGLY. 

Dolls. 

Cfs. 

'^/j/mm/y 

te^ 

/2,5 

OO 

<^y:£^^ 

/3 

So 

'iEA^c/e^  ^y  9/y7^ywy7/y- 

/32 

CS 

( ..^/.yy?/?^^ 

/// 

io 

^//)'?/?M/r 

^/ 

2S 

^//?rJy7/^lyi /[y^^ 

/oo 

00 

y^y/yr/  //y7^y??7y7Jv 

ss 

/C 

yi/yy/-  MTT^y- 

¥2/ 

CS 

/?py?rJ7y7y??y^/7^y?7A 

/9 

U 

S^^ 

/07¥ 

cc 

Illustration  No.  57,  Deposit  Tickets. 

EXPLANATION.  The  deposit  ticket  at  the  left  shows  a  deposit  of  currency  only,  and 
that  at  the  right,  currency,  silver,  and  checks.  "City  National"  at  the  left  of  the  first  check 
listed  indicates  that  the  check  is  payable  by  the  City  National  Bank  and  that  this  is  located  in  the 
same  city  as  the  Merchants  National  Bank;  this  statement  also  applies  to  the  fourth,  fifth,  and 
seventh  checks  listed.  "Chicago"  written  at  the  left  of  the  second  check  listed  indicates  that  this 
check  is  payable  on  a  bank  in  Chicago;  this  same  statement  applies  to  the  third  and  sixth  checks. 
Some  banks  do  not  require  this  information  while  others  require  information  In  another  form.  It 
is  suggested  in  §  74  that  the  depositor  learn  the  bank's  wishes  In  regard  to  the  listing  of  checks. 

as  instructed  by  the  teller.  The  receiving  teller  has  many  deposits  to  enter  each 
day  and  will  appreciate  the  cooperation  of  the  depositor  in  complying  with  his 
suggestions.  The  depositor  should  see  that  the  date,  his  name,  and  the  total 
of  the  deposit  appear  on  the  deposit  ticket,  also  that  the  currency  and  cash  items 
are  arranged  in  the  order  listed.  The  depositor  should  retain  a  copy  of  the  items 
deposited,  either  by  making  a  duplicate  deposit  ticket  or  by  listing  them  on  the 
back  of  the  stub  from  which  the  last  check  was  removed. 

§  75.  The  Pass  Book  is  a  small  bound  book  ruled  with  columns  for  the 
date,  nature  of  the  entry  (deposit,  discount,  or  collection),  and  the  amount.  As 
explained  in  §  74,  the  receiving  teller  enters  the  date  and  amount  of  each  deposit 
in  this  book,  this  being  the  depositor's  receipt  for  the  deposit.  The  depositor 
should  always  present  the  pass  book  with  the  deposit  so  that  the  teller  can  give 
him  a  receipt  for  it;  in  case  he  should  forget  to  bring  the  pass  book,  the  teller  will 
give  him  a  receipt  on  a  duplicate  deposit  ticket,  which  should  be  retained  until 
the  next  deposit  is  made  and  the  amount  entered  in  the  pass  book  at  that  time. 
Illustration  No.  59  (left  side)  shows  deposits  entered  in  a  pass  book;  further  ref- 
erence is  given  to  this  illustration  in   §  79. 


BUSINESS  FORMS  AND  VOUCHERS. 


109 


§  76.  A  Check  is  a  written  order  by  a  depositor  on  his  bank,  designating 
to  whom  he  wishes  the  bank  to  pay  a  part  or  all  of  the  money  he  has  on  deposit. 
It  is  customary  for  the  bank  to  provide  its  depositors  with  blank  checks  for  the 
same  reason  that  blank  deposit  tickets  are  provided.  Checks  supplied  depositors 
by  a  bank  are  usually  bound  in  book  form,  each  check  having  attached  to  it  a  stub 
for  the  depositor's  record.  Illustration  No.  58  shows  a  check  book  with  two  checks 
to  a  page  and  stubs  attached,  with  perforated  lines  for  detaching. 

A  check  is  not  money,  but,  since  it  is  used  in  the  place  of  money,  it  is  accepted  as  such  in  busi- 
ness. Custom  has  established  the  term  "cash"  as  one  which  includes  money  and  checks  (§  15). 
The  use  of  checks  for  paying  obligations  is  more  satisfactory  than  the  use  of  money  because  it  pro- 
vides a  receipt  and  avoids  errors  in  making  change,  and  losses  through  theft. 


Dtposit,^ 


'.-4^ 


.-3^^-L 


./S>Z_. 


Amount,  $  Jc^.rrr. 


Balanct , 


DrpaH.- 


Ko.. 


Dale ?£i^^^. 

/I 
Favert 

For  _CZ2,<.<Zf!SiSfc. 


4nunmt,  $  Z3L£A^^ 


BoJ.   Carried  Foruard 


H  o 
00 

5^ 


/S.S 


oJ^_.JL 


/-^J-.f,  /PZ.^ 


>Ierciiants  National  Bank 


k2S^ 


00 

OK 


G^^^_2_ 


_^2l^/jp/^ 


Merchants  National  Bank 


■^y?^r^yy7^,'7<>^^-i->7yy 


Illustration  No.  58,  Check  Book. 

EXPLANATION.  The  information  on  the  stub  is  arranged  in  the  same  order  as  that  on  the 
check  for  the  convenience  of  the  depositor.  The  information  after  "For"  is  needed  by  the  bookkeeper 
in  recording  the  transaction  (§  28,  ^  5).  The  ruled  column  at  the  right  of  the  stub  shows  the  de- 
positor's account  with  the  bank  as  explained  in  §  78.  The  name  of  the  depositor  at  the  left  indicates 
that  he  has  had  the  checks  prepared  for  his  individual  use.  The  dotted  lines  show  perforations  for 
removing  each  check. 

§  77.  Instructions  for  Writing  Checks.  The  check  book  provided  by 
the  bank  contains  printed  forms  for  use  in  writing  checks,  each  of  which  is  attached 
to  a  stub  containing  space  for  all  the  information  written  in  the  check.  The  stub 
is  for  the  depositor's  record  of  the  check,  hence  the  information  to  be  written 
in  the  check  should  be  written  on  the  stub  first.  The  information  written  on  the 
stub  includes  the  number,  the  date  of  issue,  the  person  or  business  concern  to  whom 
the  check  is  written,  the  reason  for  writing,  the  amount,  and,  if  desired,  the  name 
of  the  account  to  be  debited  in  the  cash  book.  Each  check  and  stub  is  numbered 
the  same  and  consecutively,  beginning  with  "i";  these  should  be  numbered  at 
the  time  the  check  book  is  received  from  the  bank. 

The  information  on  the  check  is  written  in  the  following  order:     (i)  the  date, 

(2)  the  name  of  the  person  or  business  concern  to  whom  the  check  is  to  be  paid, 

(3)  the  amount  in  writing  and  in  figures,  and  (4)  the  signature  of  the  depositor, 
which  should  be  the  same  as  that  on  the  signature  card.  If  desired,  the  reason 
for  writing  may  be  stated  on  the  check  as  well  as  on  the  stub.  The  information 
on  the  stub  and  on  the  check  should  be  arranged  in  the  same  order  so  that  the 


no 


BUSINESS  FORMS  AND  VOUCHERS. 


check  can  be  written  from  the  information  given  on  the  stub.  Illustration  No. 
58  shows  a  check  book  with  two  checks  to  the  page  and  the  two  stubs  and  checks 
properly  written,  but  with  neither  of  the  checks  removed;  the  dotted  lines  show 
the  perforations  which  make  the  checks  more  easily  removed.  The  information 
in  the  ruled  column  at  the  right  of  the  stub  in  Illustration  No.  58  is  for  the  de- 
positor's convenience  in  keeping  a  record  of  his  transactions  with  the  bank,  as 
explained  in  §  78. 

§  78.  Depositor's  Record  of  His  Transactions  with  the  Bank.  Each 
depositor  should  keep  a  record  of  the  transactions  which  he  performs  with  the 
bank.  This  record  may  be  kept  in  a  special  blank,  on  the  front  or  back  of  the  check 
stub,  or  in  an  account  in  the  ledger.  Since  the  depositor  should  know  that  the  bank 
balance  is  sufficient  to  pay  the  check  he  is  about  to  write,  the  front  of  the  stub 
is  the  best  place  to  keep  the  account  with  the  bank.  A  column  is  usually  ruled 
for  this  in  the  check  book  provided  by  the  bank.  Reference  to  Illustration  No. 
58  will  show  the  method  of  keeping  the  bank  account  on  the  front  of  the  check 
stub;    the  other  methods  mentioned  will  be  explained  and  illustrated  later. 

§  79.  The  Bank's  Record  of  Transactions  with  Depositors.  The  de- 
positor is  credited  with  each  deposit  and  debited  with  each  check  paid  by  the 
bank.  The  entry  in  his  account  is  made  from  the  deposit  tickets  and  the  checks 
which  the  bank  has  paid.  On  the  first  of  each  month,  the  bank  renders  the  de- 
positor a  statement  showing  the  date  and  amount  of  each  deposit,  the  date  paid 
and  amount  of  each  check,  the  daily  balance,  and  the  balance  due  the  depositor 
at  the  end  of  the  month.  The  checks  listed  on  this  statement  are  returned  to  the 
depositor  with  the  statement;  the  deposit  tickets  are  kept  on  file  in  the  bank. 
Formerly  it  was  the  custom  of  banks  to  render  this  statement  by  listing  the  checks 
in  the  pass  book  and  ruling  it  at  the  end  of  the  month  as  in  Illustration  No.  59. 
With  the  use  of  special  machines,  it  is  more  efficient  to  render  a  statement  sepa- 
rate from  the  pass  book,  as  in  Illustration  No.  60.  When  the  separate  statement 
is  rendered,  both  sides  of  the  pass  book  are  usually  used  for  listing  deposits,  though 
some  banks  enter  the  total  of  the  paid  checks  in  the  pass  book  and  show  the  bal- 
ance at  the  beginning  of  the  month  below  ruled  lines. 


In  Account  with 


Dr.  MERCHANTS  NATIONAL  BANK 


u 

/ 

Jt&^2^CL<U^ 

/  S'OO 

M 

J 

dAc^ 

!     bl/ 

A? 

-    /''^"""^^ 

^3  6 

'S6- 

S 

}'^S 

.2/ 

„ 

:l¥  6  Co 

/ 

/  9-  7  JO 

/v? 

/  s 

0 
3 

/7 

/  0 

i=o 

/  7S 

^I^tz/o'in^QC/ 

7  7  f 

70    . 

¥5' 

^oAz^yi-^o^y^ 

2  /// 

/S     ■ 

3,/  i 

/ 

/£- 

%^ 

_/. 

/  ^0  :i 

¥S 

Illustration  No.  59,  Bank  Statement  in  the  Pass  Book. 

EXPLANATION.  The  illustration  shows  the  opposite  pages  of  a  pass  book.  The  information 
on  the  left  page  shows  three  deposits  entered  by  the  teller.  The  entries  on  the  right  show  the  checks 
listed  by  the  bookkeeper  when  the  depositor's  pass  book  was  balanced  at  the  end  of  the  month. 
The  ruling  is  similar  to  the  receipts  and  payments  sides  of  a  cash  book.  As  explained  in  §  79,  deposits 
are  usually  entered  on  both  sides  of  the  pass  book  and  the  canceled  checks  listed  on  a  separate  state- 
ment as  in  Illustration  No.  60. 


BUSINESS  FORMS  AND  VOUCHERS.  in 

^latentPttt  of 

W.    H.    Goodwin 

3lii  arrnunt  mtll| 

jH^rdiants  Nattnnal  lank 

6  Vouchers  Returned 

r.¥  f  A  or*  irv  AA/fTXTir   at-  rkXTr-P  /IF  NO  ERRORS  ARE  REPORTED  WITHIN  TEN  DAYS  THE  ACCOUNT 
fLEAfJt.  t/AAMUNlJ/ Al  UJNCU/JYVILL     BE     CONSIDERED    CORRECT    AND    VOUCHERS     GENUINE 


,   ^         Deposit        1500.00 
*®^-  -'■        Check  £8.00 


5 

5 

8 

15 


17 
33 
S8 


"  135.00 

"  197.10 

Deposit         435.55 

Check  150.00 

"  103.60 

175.00 


Deposit  345.60 

Balance  1403.45 

Illustration  No.  6o,  Bank  Statement  Separate  from  Pass  Book. 

EXPLANATION.  This  statement  was  prepared  on  a  special  machine  manufactured  for 
making  bank  statements.  The  information  in  this  statement  is  obtained  from  the  account  which  the 
bank  keeps  with  the  depositor;  the  statement  is  rendered  monthly.  The  canceled  checks  ac- 
company the  statement  when  it  is  delivered  to  the  depositor. 

§  80.  Reconciliation  of  Depositor's  Account  with  the  Bank  State- 
ment. The  balance  shown  on  the  bank  statement  may  or  may  not  be  the  same 
as  that  shown  by  the  depositor's  record.  If  all  checks  issued  by  the  depositor 
have  been  paid  by  the  bank,  if  there  have  been  no  alterations  and  no  errors  in 
addition  or  subtraction  in  the  depositor's  record,  the  two  balances  will  be  the 
same;  if  all  the  checks  issued  have  not  been  paid  by  the  bank,  or  there  have  been 
errors  or  alterations,  the  two  balances  will  not  agree.  The  depositor  should  audit 
the  bank  statement  with  his  record  and  reconcile  the  two  balances  when  they 
do  not  agree;  this  reconciliation  should  be  made  as  soon  as  the  statement  is  re- 
ceived because  alterations  of  checks  should  be  reported  to  the  bank  immediately. 
The  calculations  in  this  reconciliation  should  be  shown  on  the  back  of  the  stub 
from  which  the  last  check  issued  during  the  month  for  which  the  statement  was 
rendered,  was  removed.  As  a  rule,  the  only  discrepancy  between  the  two  balances 
will  be  the  amount  of  the  check  or  checks  issued  by  the  depositor  but  not  paid 
by  the  bank.     The  reconciliation  should  be  made  in  the  following  manner: 

1.  Check  each  deposit  with  the  entry  for  the  same  on  the  check  stub.  If 
there  is  a  discrepancy,  compare  the  check  stub  entry  with  the  entry  in  the  pass 
book,  and  this  entry  with  that  on  the  statement.  If  there  is  a  discrepancy  in  a 
deposit  ticket  which  can  not  be  accounted  for,  it  should  be  audited  with  the  copy 
on  file  in  the  bank. 

2.  Compare  each  canceled  check  received  from  the  bank  with  the  stub  from 
which  it  was  removed;  any  discrepancy  between  the  amount  on  the  stub  and  that 
on  the  statement  should  be  reported  to  the  bank  immediately.  Place  a  check 
mark  at  the  left  of  the  number  on  the  stub  as  each  check  is  compared  with  its 
corresponding  stub. 


112 


BUSINESS  FORMS  AND  VOUCHERS. 


3.  On  the  back  of  the  stub  from  which  the  last  check  written  during  the 
month  was  removed,  Hst  the  number  and  amount  of  each  stub  which  does  not  have 
a  check  mark  at  the  right  of  the  number;  add  these  amounts  to  ascertain  the  total 
of  the  checks  issued  but  not  paid  by  the  bank.  Write  the  balance  shown  by  the 
bank  statement  below  the  total  unpaid  checks,  and  subtract  the  amount  of  the 
unpaid  checks  from  the  bank  balance;  the  result  should  be  the  same  as  the  check 
stub  balance. 


\.     MARK/ 


'^M^.^?/  V. 


19l_  3(o._91_" 


^/,//^§ 


^.YyQ^^  '/olf^.v/.r//i^^ ^^y:)'7!^/-m7^ya/??y/- 


^^offaii 


|.^n ti^t^liAe JRa uUa\ \an  (£0. 


vJjrny 


^fCii&  Areas'. 


Illustration  No.  61,  Personal  Check. 

EXPLANATION.  This  illustration  shows  a  check  prepared  by  the  depositor.  It  includes  the 
usual  information  and  the  name  and  trade  mark  of  the  business. 

§  81.  A  Bank  Draft  is  a  check  drawn  by  one  bank  on  funds  deposited 
with  another  bank.  Bank  drafts  are  sometimes  referred  to  as  "exchange;"  a  draft 
payable  by  a  bank  in  New  York,  as  "New  York  Exchange;"  one  payable  by  a 
Chicago  bank,  as  "Chicago  Exchange;"  etc.  Bank  drafts  are  used  by  banks  in 
payment  of  checks  received  for  collection,  sold  to  depositors  for  remitting  to  the 
commercial  centers,  and  sold  to  individuals  for  sending  money  through  the  mail. 
Illustration  No.  62  shows  a  bank  draft  payable  by  the  Chase  National  Bank  of 
New  York,  hence  might  be  referred  to  as  "New  York  Exchange."  The  use  of 
bank  drafts  is  discussed  again  in  a  subsequent  chapter. 


00  S2S       '^ 


'^xmB^^wm^WiM^M^M.^  x»   3459 


Pay  TOTIIK 

OKDER  OE 


^'^  CHASE  NATIONAL  BANK. 

1-T4.  NEW  YORK. 


rw£/^ryog^-g    T>« 


C-y^>"2€:-g?^0^???^>^^^^^^^^^      I 


Illustration  No.  62,  New  York  Bank  Draft. 

EXPLANATION.     This  illustration  shows  a  check  drawn  by  the  First  National  Bank,  Tur- 
lock,  California,  on  funds  which  it  has  deposited  with  the  Chase  National  Bank,  New  York. 


BUSINESS  FORMS  AND  VOUCHERS. 


113 


§  82.  A  Cashier's  Check  is  a  check  drawn  on  a  bank  by  its  cashier.  It 
is  used  in  the  payment  of  the  operating  expenses  of  the  bank,  in  payment  of  the 
proceeds  of  collections  or  discounts  made  by  the  bank,  and  in  payment  of  other 
obligations  of  the  bank.  Cashier's  checks  are  sold  to  those  who  wish  to  use  them 
as  a  means  of  sending  cash  through  the  mails  in  the  same  manner  as  bank  drafts. 
Illustration  No.  63  shows  one  form  of  cashier's  check. 


K'!n  B»  -   -*-  •  X^?-«!  6X^    '»•  --XB:a,ft3»«-   '<«rTii«B^W^«TfJ^  SX--  -i*-^ 


3r    SPOKANE 


Spok.\x*;AVash.._^ 19 No.   2355 


CVSIIIER'S  CHECK. 


-  -a-sK.*  »: B»»%>3»g»-s«a;^  »«»**^«3^-*««!» 


Illustration  No.  63,  Cashier's  Check. 

EXPLANATION.  This  illustration  shows  a  check  drawn  by  the  cashier  of  the  Security  State 
Bank,  Spokane,  Wash.,  and  payable  by  this  bank. 

§  83.  Money  Orders.  A  money  order  is  a  check  issued  by  one  post- 
master on  funds  deposited  with  another  postmaster,  by  one  agent  of  an  express 
company  on  funds  deposited  with  another  agent  of  the  same  company,  or  by  a 
bank  on  funds  deposited  with  the  Banker's  Trust  Company  of  New  York.  The 
first  is  referred  to  as  a  "postal  money  order;"  the  second,  an  "express  money 
order;"    and  the  third,  an  "American  Bankers'  Association   (A.  B.  A.)   check." 


% 


When  Countersigned      i=y.i;j:i^^tJir.i'i:ng'i:<n3K 

BY  AGENT  AT  PorNT  OFISSUE 


11-5684625 


^^erjrmi  <^it^  g|jnt|j^ttir 


Pay  TO  THE  ORDER  0F_ 


AGREES  TO  TRANSMIT  AND 


so 

//^ 

\ 

The  Sum  of_ 


■^^ 


V^-o^y-  j'yyT^./'-'^/rpy:^-' 


IoIDollars 


(^J^/7.r^..7/^^ 


Issued  AT 


=   Date. 


.Agent 


State  of  //u/'J^.^ 


Illustration  No.  64,  Express  Money  Order. 

EXPLANATION.  This  illustration  shows  a  money  order  issued  by  the  American  Express 
Company.  Carl  C.  Davidson,  who  wished  to  send  money  to  Harold  A.  Waltham,  presented  $48.50 
and  the  required  fee  to  an  agent  of  the  American  Express  Company  and  received  this  money  order  for 
it.  The  purpose  of  money  orders  is  to  provide  a  means  of  transferring  money  from  one  locality  to  an- 
other with  safety  and  convenience. 


114 


BUSINESS  FORMS  AND  VOUCHERS. 


Postal  money  orders  are  for  sale  by  each  postmaster  to  those  who  wish  to  send 
money  through  the  mail;  they  are  also  used  by  postmasters  in  remitting  for  col- 
lect on  delivery  parcel  post  shipments.  Express  money  orders  are  for  sale  to  those 
who  wish  to  send  money  through  the  mail  and,  in  this  respect,  are  used  for  the 
same  purpose  as  post-office  money  orders.  Express  money  orders  are  arranged 
in  convenient  form  for  those  who  need  expense  money  for  a  business  or  pleasure 
trip  and  do  not  wish  to  carry  currency;  they  are  also  used  by  express  company 
agents  for  remitting  on  "collect  on  delivery"  express  shipments.  Bank  drafts  are 
used  in  the  same  way  as  express  money  orders — that  is,  for  sending  money  through 
the  mail — and  for  the  convenience  of  those  v/ho  wish  to  have  available  cash,  but 
cash  without  carrying  currency.  A  detailed  discussion  of  "collect  on  delivery" 
shipments  and  a  further  discussion  of 'the  use  of  express  money  orders  in  con- 
nection with  making  remittances,  are  given  in  a  subsequent  chapter. 

§  84.  Endorsements.  An  endorsement  is  any  writing  on  the  back  of  a 
check  or  other  commercial  paper,  placed  there  for  the  purpose  of  transferring  the 
title,  receipting  for  part  payment,  or  for  the  accommodation  of  some  one  or  more 
of  the  parties  on  the  paper.  For  convenience  the  endorsement  should  be  written 
about  one  inch  from  the  left-hand  end  of  the  paper,  as  in  Illustration  No.  65. 

The  endorsing  of  commercial  paper  should  be  well  understood,  as  it  trans- 
fers the  title  to  the  holder  and  holds  the  endorser  liable  in  case  default  is  made 
in  payment.  The  law  allows  the  same  protection  to  commercial  paper  as  it  does 
to  money,  and  unless  it  is  properly  endorsed,  if  lost,  the  finder  may  dispose  of  it 
to  an  innocent  holder,  in  which  case  the  loser  can  not  recover  it. 


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Illustration  No.  65,  Position  of  Endorsement. 

EXPLANATION.  This  check  is  payable  to  The  National  Lead  Co.  and  endorsed  by  it  for 
deposit  with  the  Third  National  Bank.  The  endorsement  is  placed  on  the  left-hand  end  of  the  check 
for  convenience. 


BUSINESS  FORMS  AND  VOUCHERS. 


115 


John  Jones 


Pay  to  the  order  of 
C.  W.  King 
John  Jones 


§  85.  Endorsement  for  Transfer,  There  are  a  number  of  ways  in  which 
the  holder  of  a  commercial  paper  may  write  his  name  in  order  to  transfer  the  title, 
but  the  four  most  frequently  used  are  "in  blank,"  "in  full,"  "for  deposit"  and 
"for  collection." 

^  I.  ''In  Blank.''  An  endorsement  in  blank  is  the 
name  of  the  payee  or  holder  only,  written  across  the 
back.  It  has  the  same  effect  as  making  the  paper  pay- 
able to  bearer,  and  it  may  be  transferred  by  any  sub- 
sequent holder,  without  further  endorsement,  but  the 
endorsement  of  each  holder  is  generally  required,  for 
identification.     See  illustration  at  the  left. 

II  2.  "In  Full.'"  This  endorsement  is  effected  by 
writing  "Pay  to  the  order  of"  above  the  name  of  the 
person  or  firm  to  whom  it  is  transferred,  and  signing 
the  name  of  the  payee  or  holder.  The  person  to  whom 
it  is  transferred  must  endorse  it  before  any  succeeding 
holder  can  use  it.  All  papers  sent  through  the  mail, 
or  to  be  held  for  some  time  should  be  endorsed  in  full. 
See  illustration  at  the  left. 

•[  3.  "For  Deposit.'"  These  words  should  be 
written  above  the  name  of  the  depositor  on  checks  and 
other  cash  items  to  be  deposited  in  the  bank.  This 
qualifies  the  endorsement  and  prevents  their  being  used 
except  for  deposit.  If  desired,  a  rubber  stamp  with  the 
words  of  the  illustration  at  the  left  may  be  used  for 
this  purpose.  If  a  stamp  is  used,  the  one  who  makes 
the  deposit  should  indicate  his  name  in  connection 
with  the  endorsement. 

^  4.  "For  Collection."  Commercial  paper  left  at 
a  bank  or  other  collection  agency  for  collection,  should 
have  "For  Collection"  written  above  the  endorsement, 
as  in  the  illustration  at  the  left.  Unless  the  endorse- 
ment is  qualified  in  this  manner,  the  owner  might  be 
held  responsible  as  an  endorser  for  the  collection  of 
the  paper  in  case  of  the  bankruptcy  of  the  bank  or 
collection  agency.  This  is  a  condition  that  might  not 
occur  often,  but,  if  it  can  be  avoided  by  the  qualified 
endorsement,  then  the  holder  should  protect  his  in- 
terests through  the  endorsement. 

The  result  of  improper  endorsements  for  collection  may  be  illustrated  by  the  following  incident, 
which  is  true  with  the  exception  of  the  names.  Robert  Smith  endorsed  a  note  in  blank  and  left  it 
with  his  bank  for  collection.  Mr.  Smith  died  before  the  note  was  due.  The  bank  failed  and  a  receiver 
was  appointed.  Transactions  performed  by  the  bank  had  not  been  recorded  correctly  and  in  sorne 
cases  there  was  doubt  as  to  the  ownership  of  the  papers.  The  estate  of  Mr.  Smith  could  submit 
no  evidence  to  show  that  the  note  endorsed  by  him  was  left  for  collection,  hence  the  receiver  of  the 
bank  assumed  that  it  was  discounted,  and  held  the  estate  responsible  on  account  of  Smith's  endorse- 
ment. 


Pay  to  the  order  oj 

Union  Ba7ik 

For  deposit 

W.  H.  Goodzvin 


Pay  to  the  order  of 

Union  Bank 

For  collection 

W .  H.  Goodzvin 


Exercise  No.  44,  Personal  Check. 

As  paying  cashier  for  the  Johnson  Paint  Co.,  Chicago,  write  the  stub  and 
check  required  to  pay  for  the  merchandise  purchased  from  the  Globe-Wernicke 
Co.,  Cincinnati,  in  Exercise  No.  43.  Use  the  first  check  and  stub  in  Illustration 
No.  58  as  a  model. 


ii6 


BUSINESS  FORMS  AND  VOUCHERS. 


Exercise  No.  45,  Reconciliation  of  Bank  Account. 

J.  E.  Gill  performed  the  following  transactions  with  the  Merchants  National 
Bank  during  the  month  of  April: 


2. 

Deposit 

$2 ,900 .  00 

13. 

Check  No. 

13 

1457-74 

2. 

Check  No. 

I 

208.80 

14. 

(1         11 

14 

48.10 

2. 

2 

20.00 

14. 

(<         II 

15 

273.42 

3- 

3 

450.00 

14. 

Deposit 

341-38 

4- 

4 

101.00 

16. 

Check  No. 

16 

150.00 

5. 

5 

150.00 

18. 

II         II 

17 

256.01 

6. 

6 

75.00 

21. 

II         II 

18 

94-75 

7. 

7 

165.50 

-    21. 

Deposit 

791.00 

7. 

8 

40.00 

24. 

Check  No. 

19 

141.32 

7- 

9 

38.00 

25- 

II         II 

20 

103.88 

7- 

Deposit 

248.65 

27. 

II         II 

21 

279.77 

lO. 

Check  No. 

10 

445-23 

28. 

II         II 

22 

38.00 

II. 

n              n 

II 

60.00 

30. 

II         II 

23 

567-43 

II. 

11              II 

12 

49-50 

30. 

Deposit 

815.24 

1.  On  a  slip  of  paper,  write  "Bank  Account  on  Check  Stub,"  and  below  this 
write  the  date  and  amount  of  each  deposit,  the  date,  number,  and  amount  of  each 
check,  showing  the  balance  in  the  bank  after  each  deposit  has  been  added  and 
each  check  subtracted. 

2.  On  a  slip  of  paper,  write  "Reconciliation  of  Bank  Account,"  and  below 
this  show  the  reconciliation  of  Mr.  Gill's  bank  account  with  the  statement  re- 
ceived from  the  bank  May  i,  which  shows  a  balance  of  $1,667.57  and  is  accompanied 
by  all  canceled  checks  except  Nos.  9,  19,  22,  and  23. 

Exercise  No.  46,  Reconciliation  of  Bank  Account. 

Show  the  bank  account  on  the  front  of  the  check  stub  for  W.  A.  Gordon 
(Model  Set  beginning  on  page  61)  for  the  month  of  September  and  on  the  back 
of  the  check  stub  for  the  month  of  October,  assuming  that  all  payments  were 
made  by  check,  that  the  investment  September  i  was  deposited  on  that  date 
and  other  deposits  were  made  each  time  cash  was  proved,  and  that  the  check 
book  contained   two  checks  to   the  page.* 

Show  the  reconciliation  of  the  bank  account  on  October  i  with  the  statement 
received  from  the  bank  on  that  date,  which  shows  a  balance  of  $768.00  and  is 
accompanied  by  all  canceled  checks  except  No.  6. 

Show  the  reconciliation  of  the  bank  account  on  November  i  with  the  state- 
ment received  from  the  bank  on  that  date,  which  shows  a  balance  of  $703.39  and 
is  accompanied  by  all  canceled  checks  except  Nos.   12  and   16. 

*When  the  bank  account  is  kept  on  the  front  of  the  check  stub,  each  check  is  subtracted  as 
it  is  written,  each  deposit  is  added  at  the  time  it  is  made,  and  the  balance  is  carried  forward  at  the 
bottom  of  each  page  as  in  Illustration  No.  58.  When  the  bank  account  is  kept  on  the  back  of  the 
check  stub,  the  number  and  amount  of  each  check  issued  since  the  last  deposit  was  made  are  listed, 
added,  and  subtracted  from  the  sum  of  the  preceding  balance  and  the  deposit  that  is  to  be  made. 
In  September  the  student  will  subtract  each  check  as  it  is  issued  from  the  deposit  of  September 
1st  until  the  next  deposit  is  made;  this  deposit  will  be  added  to  the  balance  left  after  subtracting 
the  last  check,  and  succeeding  checks  will  be  subtracted  as  they  are  issued,  showing  in  each  case 
the  balance  in  the  bank  after  each  check  is  issued.  In  October  the  balance  and  the  first  deposit, 
which  is  made  at  the  time  cash  is  proved,  are  added  together;  checks  issued  between  October  ist 
and  the  date  of  the  first  deposit  in  October  are  listed,  added,  and  their  total  subtracted  from  the 
total  of  the  balance  and  the  deposit,  the  result  showing  the  balance  in  the  bank  at  the  time  cash 
is  proved. 

QUESTIONS 

1.  Why  do  the  officials  of  a  bank  require  reference  from  a  new  depositor  if  they 

are  not  personally  acquainted  with  him? 

2.  What  evidence  does  the  depositor  have  that  he  has  deposited  money  in  the 

bank? 


BUSINESS  FORMS  AiND  VOUCHERS.  117 

3.  What  evidence  does  the  bank  have  that  it  has  paid  a  part  or  all  of  the  money 

which  the  depositor  has  deposited? 

4.  Why  should  the  bookkeeper  retain  a  copy  of  each  deposit  ticket? 

5.  Name  two  ways  of  retaining  this  copy. 

6.  What  additional  information  is  contained  in  the  copy  of  the  deposit  ticket 

that  is  not  shown  by  the  entry  in  the  pass  book? 

7.  If  you  were  auditing  the  entries  on  the  receipts  side  of  the  cash  book,  what 

need  would  you  have  for  the  copies  of  the  deposit  tickets  and  the  entries 
in  the  pass  book? 

8.  If  you  were  to  find  a  check  signed  by  a  local  merchant,  payable  to  Robert  Jones, 

and  "Robert  Jones"  was  written  on  the  back,  how  could  you  obtain  the 
money  on  this  check? 

9.  If  the  bookkeeper  writes  a  check  and  fails  to  fill  out  the  stub,  how  will  he 

detect  the  error? 

10.  If  you  were  keeping  books  for  a  local  merchant  and  he  withdrew  $100.00 

from  the  bank  by  check,  using  one  of  the  blanks  on  the  counter  in  the 
bank,  and  failed  to  tell  you  that  he  had  issued  the  check,  when  and  how 
would  you  learn  about  it? 

11.  Name  two  means  of  ascertaining  the  amount  of  a  check  if  it  is  removed  from 

a  check  stub  without  the  stub  being  filled  out? 

12.  If  the  bookkeeper  makes  an  error  of  $10.00  in  subtracting  the  amount  of  a 

check  on  the  check  stub,  how  will  he  detect  the  error? 

13.  If  you  were  keeping  books,  would  you  prove  cash  before  making  a  deposit? 

Give  reasons  for  your  answer. 

14.  If  there  is  an  error  of  $10.00  in  the  addition  of  a  deposit  ticket  and  a  cor- 

responding error  in  the  addition  in  the  cash  book,  when  and  how  will  the 
bookkeeper  discover  the  error? 

15.  How  is  a  check  used  in  the  place  of  money? 

16.  Explain  why  a  check  which  has  been  paid  by  the  bank  may  be  regarded  as  a 

receipt. 

17.  If  you  were  making  a  trip  in  an  automobile  from  New  York  City  to  San 

Francisco,  would  you  prefer  your  expense  funds  to  be  in  money,  to  be 
deposited  in  a  Chicago  bank  subject  to  check,  or  in  money  orders?  Give 
reasons  for  your  answer. 

18.  John  Anderson  in  Atlanta,  Georgia,  wishes  to  send  $35.00  to  Henry  Smith 

in  St.  Louis,  Missouri.  Name  four  ways  by  which  he  can  send  this,  and 
state  which  you  think  would  be  the  best. 

19.  Why  is  it  better  for  the  bookkeeper  to  keep  the  bank  account  on  the  front 

of  the  check  stub? 

20.  Name  three  reasons  why  the  statement  rendered  by  the  bank  on  the  first 

of  the  month  might  be  different  from  the  depositoi's  record  on  the  check 
stub. 

21.  If  R.  W.  Sanderson  leaves  a  check  payable  to  himself  at  the  bank  for  collec- 

tion, how  will  he  endorse  it? 

22.  If  you  were  keeping  books  for  a  local  merchant  and  received  a  check  from 

a  customer  for  $112.50  marked  "In  full  of  account,"  and  his  account  showed 
a  balance  of  $117.50,  what  would  you  do? 

23.  Name  some  of  the  advantages  to  the  bookkeeper  when  cash  payments  are 

made  by  check  instead  of  with  currency. 

24.  Why  does  the  bank  return  the  paid  checks  when  it  sends  the  monthly  state- 

ment? 

25.  Why  is  the  endorsement  written  on  the  left  instead  of  the  right  end? 


Chapter  XI 

BUSINESS  FORMS  AND  VOUCHERS— (Concluded) 

§  86.  A  Note  is  an  unconditional  written  promise  to  pay  a  fixed  amount 
of  money  at  a  stated  time,  and  is  signed  by  the  person  or  persons  agreeing  to  pay 
it.  If  desired,  the  place  at  which  the  note  is  to  be  paid  may  be  stated  in  it.  A  note 
has  two  original  parties,  the  maker  and  the  payee.  The  maker  is  the  one  who 
signs  the  note  and  thereby  agrees  to  pay  the  amount  stated  in  it;  the  payee  is 
the  one  in  whose  favor  the  note  is  made,  that  is,  the  one  to  whom  the  money  is 
to  be  paid.  A  note  indicates  that  the  maker  is  indebted  to  the  payee  and  acknowl- 
edges this  indebtedness  by  agreeing  to  pay  it  at  the  time  stated  in  the  note. 

1.  The  face  of  a  note  is  the  amount  stated  in  it.  This  amount  is  shown  as  its 
value  in  the  account  with  notes  (§  102,  ^  i,  or  §  103,  If  2). 

2.  The  maturity  value  of  a  note  is  the  amount  to  be  collected  at  maturity.  If 
a  note  reads  "with  interest  after  maturity,"  the  face  is  the  maturity  value;  if  it 
reads  "with  interest  from  date,"  the  maturity  value  is  the  face  plus  interest  at  the 
legal  rate  from  date  to  maturity. 


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Illustration  No.  66.  Note  With  Stub  Attached. 


EXPLANATION.  This  note  indicates  that  A.  C.  Williams  owes  W.  H.  Goodwin  the  amount 
mentioned  and  has  promised  to  pay  it  at  the  time  and  place  indicated. 

§  87.  Use  of  Notes.  Notes  are  used  as  written  evidence  of  indebtedness 
resulting  (a)  from  a  purchase  of  merchandise  or  other  property,  (b)  from  a  loan,  or 
(c)  from  an  extension  of  time  for  the  payment  of  a  past-due  obligation  as  shown 
by  an  account.  With  the  advantages  of  the  trade  acceptance,  notes  are  not  often 
given  in  payment  for  merchandise  purchased  at  the  time  it  is  purchased.  A  bank 
will  require  written  evidence  of  an  obligation  resulting  from  money  loaned;  the 
business  man  may  give  his  own  note  as  evidence  of  the  loan,  or  he  may  sell  to 
the  bank  notes  which  he  has  received  from  his  customers.  When  an  account  is 
past  due  and  the  customer  desires  more  time,  he  may  make  settlement  by  accept- 
ing a  draft  or  by  giving  his  note;    the  results  are  the  same  in  that  he  secures  an 

118 


BUSINESS  FORMS  AND  VOUCHERS.  119 

extension  of  time  by  giving  a  written  promise  to  pay  it  at  the  time    specified    in 
the  note  or  draft. 

(a)  James  Brown  buys  a  piano  from  the  Starr  Piano  Co.  for  $500.00.  He  pays  $100.00  cash 
and  gives  four  notes  for  $100.00  each,  due  in  three,  six,  nine,  and  twelve  months  respectively,  in 
payment  for  the  piano. 

(b)  The  Starr  Piano  Co.  wishes  to  borrow  $1,000.00  from  the  bank  with  which  it  does  busi- 
ness. A  note  is  issued  for  this  amount,  bearing  interest  at  6%  from  date,  payable  in  ninety  days, 
and  this  is  presented  to  the  bank  for  credit.  The  Starr  Piano  Co.  will  receive  credit  for  the  $1,000.00 
in  their  pass  book  in  the  same  manner  as  for  a  deposit. 

(c)  The  Acme  Amusement  Co.  purchased  an  electric  player  piano  from  the  Starr  Piano  Co. 
for  $1,500.00,  and  paid  $800.00  cash,  balance  to  be  paid  in  thirty  days.  At  the  end  of  the  thirty 
days  the  Acme  Amusement  Co.  arranged  with  the  Starr  Piano  Co.  for  an  extension  of  sixty  days  by 
giving  their  note  for  $700.00,  with  interest,  payable  to  the  Starr  Piano  Co. 

§  88.  Endorsement  of  Notes.  There  are  three  reasons  for  the  endorse- 
ment of  a  note:  (a)  accommodation  (security),  (b)  transfer  of  ownership,  and 
(c)  receipt  for  part  payment.  Endorsement  for  accommodation  is  usually  made 
as  explained  in  §  85,  ^  i ;  endorsement  for  transfer  of  ownership  is  usually  made 
as  explained  in  §  85,  *f[  2;  endorsement  for  a  receipt  of  $100.00  in  part  payment 
of  this  note  is  made  as  follows:  "Jan.  10,  Received  $100.00  in  part  payment  of 
this  note."  The  holder  will  endorse  the  part  payment  on  the  note  but  should 
not  sign  his  name  because  this  transfers  ownership  in  case  the  note  gets  out  of 
his  possession. 

Banks  sometimes  require  security  in  addition  to  the  signature  of  the  business  concern  borrow- 
ing money.  Should  this  have  been  required  of  the  Starr  Piano  Co.  in  the  loan  of  $1,000.00  mentioned 
in  §  87,  (b),  one  of  the  individuals  who  owns  an  interest  in  the  business  would  sign  his  name  on  the 
back  as  explained  in  §  85,  ^  i.  Should  the  Starr  Piano  Co.  wish  to  sell  the  note  received  from  James 
Brown,  the  endorsement  would  be  "in  full"  as  explained  in  §  85,  ^  2.  If  the  note  was  to  be  trans- 
ferred to  the  First  National  Bank,  the  endorsement  would  be  "Pay  to  the  order  of  the  First  National 
Bank,  Starr  Piano  Co.,  by  (the  name  of  the  person  authorized  to  sign  for  the  company)."  Should 
the  Acme  Amusement  Co.  in  the  illustration  pay  $200.00  on  the  note  given  in  extension  of  its  account, 
receipt  for  part  payment  would  be  indicated  by  writing  the  date  and  the  amount  received  on  the 
back,  as  explained  above. 

§  89.  Effect  of  Notes  on  the  Bookkeeping  Records.  When  a  note  is 
issued  by  the  business,  full  information  in  regard  to  it  is  retained  on  the  stub  from 
which  it  was  removed.  An  entry  is  required  in  a  book  of  original  entry  because 
the  note  would  not  have  been  issued  unless  value  was  received;  the  value  received 
might  be  an  obligation  canceled  or  a  new  obligation  created.  If  the  note  cancels 
a  liability,  the  value  received  is  the  discharge  of  this  obligation  or  liability,  hence 
the  account  which  shows  it  is  debited;  if  the  note  creates  a  new  obligation,  an 
asset  of  equal  value  is  received,  hence  the  value  received  is  this  asset,  and  the 
account  with  it  is  debited;  the  value  parted  with  in  either  case  is  the  obligation 
created  by  the  note,  hence  the  account  with  notes  issued  by  the  business  (§  103, 
^  2)  is  credited.  When  a  note  is  received  by  the  business,  it  may  be  in  payment 
for  merchandise  or  other  property  purchased  at  the  time  the  note  was  issued. 
The  value  received  is  the  note,  hence  the  account  which  is  to  show  the  amount 
of  notes  owned  by  the  business  (§  102,  %  i)  is  debited.  The  value  parted  with  is 
the  merchandise  sold  or  the  account  with  the  customer,  hence  either  the  Sales  or 
the  customer's  account  is  credited.  If  desired,  the  sale  can  be  entered  in  the  sales 
journal  in  the  same  manner  as  any  other  sale  on  account,  debiting  the  customer's 
account;  in  this  case,  the  credit  to  the  Sales  account  will  be  through  the  sales 
journal,  hence  the  credit  for  the  note  would  be  to  the  customer's  account  in  the 
same  manner  as  if  the  note  were  received  in  payment  of  an  account  already  in 
the  ledger. 


120  BUSINESS  FORMS  AND  VOUCHERS. 

Transactions  in  which  notes  are  issued  or  received  by  the  business  are  usu- 
ally recorded  in  the  general  journal  unless  cash  is  received  for  a  note  issued  or  paid 
for  a  note  received,  in  which  case  the  entry  is  made  in  the  cash  book.  Special 
journals  may  be  provided  for  notes  issued  and  received  by  the  business;  these  are 
explained  and  illustrated  in  a  subsequent  chapter. 

Referring  to  the  illustrations  in  §  87: 

(a)  The  sale  would  be  recorded  in  the  sales  journal,  thus  debiting  James  Brown  and  credit- 
ing Sales;  the  cash  would  be  recorded  in  the  cash  book,  thus  debiting  Cash  and  crediting  James 
Brown;  and  the  notes  would  be  recorded  in  the  general  journal,  debiting  the  account  with  notes 
received  (§  102,   H  l)  and  crediting  James  Brown. 

(b)  The  entry  would  be  made  on  the  receipts  side  of  the  cash  book,  thus  debiting  Cash  and 
crediting  the  account  with  the  note  issued  by  the  business  (§  103,  If  2.) 

(c)  The  sale  would  be  recorded  in  the  sales  journal,  thus  debiting  the  Acme  Amusement  Co. 
and  crediting  Sales;  the  cash  would  be  recorded  in  the  cash  book,  thus  debiting  Cash  and  crediting 
the  Acme  Amusement  Co.;  the  note  would  be  recorded  in  the  general  journal,  debiting  the  account 
with  notes  received  (§  102,  ^  i)  and  crediting  the  Acme  Amusement  Co. 

§  90.  A  Note  Should  Be  Signed  by  the  person  or  persons  responsible  for 
its  payment.  If  an  agent  is  authorized  to  execute  a  note  for  another,  he  signs 
the  name  of  his  principal  and  his  name  below,  either  preceded  by  "per"  or  "by" 
or  followed  by  "agent;"  the  omission  of  the  word  before  or  after  the  agent's  name 
might  cause  him  to  be  held  jointly  with  the  principal.  The  one  who  signs  a  note 
for  another  is  regarded  as  the  agent,  and  the  one  responsible  for  the  payment,  as 
the  principal;  the  agent  should  have  a  written  statement  from  the  principal  author- 
izing him  to  sign  his  name.  The  holder  of  a  note  will  expect  payment  from  the  per- 
son or  persons  whose  names  are  signed  to  it;  he  will  also  hold  responsible  for  the 
payment  each  individual  whose  name  appears  on  the  back  of  the  note. 

Referring  to  the  illustrations  in  §  87 : 

(a)  The  notes  would  be  signed  by  James  Brown  who  purchased  the  piano. 

(b)  This  note  would  be  signed  "Starr  Piano  Co.,"  by  the  individual  authorized  to  sign, 
usually  the  president  or  secretary  if  it  is  a  corporation,  or  one  of  the  partners  if  it  is  a  partnership. 

(c)  This  note  would  be  signed  in  the  same  manner  as  that  described  in'(b)  because  the  name 
of  the  company  is  not  that  of  an  individual  and  means  nothing  when  signed  to  a  note  unless  accom- 
panied by  the  name  of  the  individual  authorized  to  sign. 

§  91.  A  Draft  is  a  written  order  from  one  party  to  another,  directing  him 
to  pay  a  certain  sum  of  money  to  a  third  party.  A  draft  has  three  original  par- 
ties: the  drawer,  the  drawee,  and  the  payee.  The  one  signing  the  draft  is  the 
drawer;  the  one  who  is  asked  to  pay  the  amount  is  the  drawee;  and  the  one  to 
whom  the  money  is  to  be  paid  is  the  payee.  The  draft  indicates  that  the  drawee 
is  indebted  to  the  drawer,  and  that  he  (the  drawer)  wishes  the  amount  paid  to 
the  payee.  Drafts  are  usually  drawn  on  blank  forms  bound  in  a  book,  each  draft 
being  provided  with  a  stub  for  a  record  of  the  facts  shown  by  the  draft.  There 
are  three  kinds  of  drafts,  time  drafts,  sight  drafts,  and  trade  acceptances. 

§  92.  A  Time  Draft  is  one  payable  a  certain  number  of  days  after  pre- 
sentation; it  indicates  that  the  drawer  is  willing  to  allow  the  drawee  additional 
time  to  make  payment  of  the  indebtedness  due  the  drawer.  This  additional  time 
is  indicated  by  stating  in  the  draft  that  the  amount  is  to  be  paid  the  designated 
number  of  days  after  acceptance.  The  drawee  of  a  time  draft  is  not  obligated 
to  accept  it  when  it  is  presented  by  the  payee.  If  he  does  accept  it,  this  acceptance 
is  indicated  by  writing  across  the  face  of  the  draft  the  word  "Accepted,"  followed 
by  the  date  of  acceptance,  and  the  drawee's  signature;  if  desired,  the  place  of 
payment  may  also  be  indicated  in  the  acceptance.  If  the  drawee  does  not  elect 
to  accept  the  draft  when  presented  to  him  by  the  payee,  the  payee  should  im- 
mediately leturn  it  to  the  drawer  so  that  he  may  know  the  drawee  has  not  complied 
with  his  request.     Illustration  No.  67  shows  one  form  of  time  draft. 


BUSINESS  FORMS  AND  VOUCHERS. 


121 


I.  An  acceptance  is  a  time  draft  after  it  has  been  accepted.  It  is  the  same  as 
a  note  because  the  acceptance  is  the  written  promise  of  the  person  who  accepts  it 
to  pay  the  amount  mentioned  within  the  number  of  days  stated  in  the  draft.  The 
account  which  shows  a  record  of  notes  should  also  contain  a  record  of  accepted 
drafts. 

■      \*^ 

Draft  for  S4^^-^^^^ 

On  ^^ 


PlaceJ 

Timp  C?c;  <£,a^^ 

Infavorof^ 


J 


2y^i 


aw  1 


&^<wamiw>i*vtwa.rwy^w*wiv->WMb^>ff->am<tywi^^ 


Illustration  No.  67,  Time  Draft  Accepted  and  Returned. 

EXPLANATION.  The  draft  in  the  illustration  was  drawn  June  10,  sent  to  the  bank  for 
presentation  and  acceptance,  presented  to  the  drawee  and  accepted  by  him  on  June  15,  and  returned 
to  the  drawer  by  the  bank.  The  draft  is  shown  detached  from  the  stub  because  the  date  of  accept- 
ance was  entered  on  the  stub  by  the  bookkeeper  for  Donaldson  &  Joy  after  the  draft  was  accepted 
and  returned. 

The  bookkeeper  should  indicate  on  the  stub  the  final  disposition  of  each  sight  and  time  draft 
drawn  by  showing  the  acceptance  on  the  stub  as  in  the  above  illustration,  or,  if  a  sight  draft,  by 
entering  "Paid"  and  the  date  of  payment  on  the  stub,  or  by  entering  "Returned"  and  the  date  on 
the  stub  if  either  the  sight  or  time  draft  is  not  paid  or  accepted.  The  acceptance  of  a  time  draft  and 
the  entry  on  the  stub  may  be  made  with  red  or  black  ink;  the  use  of  red  ink  is  optional  with  the 
bookkeeper. 

§  93.  A  Si^ht  Draft  is  one  which  is  payable  upon  presentation ;  it  in- 
dicates that  the  indebtedness  of  the  drawee  to  the  drawer  is  due  or  past  due,  and 
that  the  drawer  desires  it  to  be  paid  immediately.  The  drawee  of  a  sight  draft 
is  not  obligated  to  pay  it  when  it  is  presented  to  him  by  the  payee,  but  if  he  does 
pay  it,  he  will  hold  the  draft  as  his  receipt  for  the  payment;  if  he  refuses  payment, 
the  payee  should  return  the  draft  to  the  drawer  at  once.  Illustration  No.  68  shows 
one  form  of  sight  draft. 


Draft  for  S^^^^-/i£g- 
Da  t  p  ^a^J./^  /ai. 
0  n  i^:^^^zE^4is-5- 

PI  a  C  e.k^2til^a£^?Si:£_ 

Timp  xJ^-'oJzJ- 


Infavor  olMj^a^L^^ 

;vp_97 


9i^lMI9l^^ilK^lM9iKKf^it^t9t9S^KKf90^iJX^iK>9&J&^l 


%1^, 


Chicago,  III  J^2^j./.     J.O 


JJ«iliii»vt»»/»nif«vlulw-<l 


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Illustration  No.  68,  Sight  Draft  with  Stub  Attached. 

EXPLANATION.  The  draft  in  this  illustration  indicates  that  W.  H.  Goodwin  of  San  Antonio, 
Texas,  owes  Anderson  Bros,  of  Chicago,  the  amount  mentioned  in  the  draft.  Anderson  Bros,  have 
asked  him  to  pay  the  amount  to  the  First  National  Bank  of  San  Antonio,  Texas.  This  draft  will  be 
sent  to  the  First  National  Bank  with  instructions  to  present  it  for  collection.  If  W.  H.  Goodwin 
pays  the  draft  when  it  is  presented,  the  bank  will  write  Anderson  Bros,  to  this  effect  and  send  a 
bank  draft  or  cashier's  check  for  the  amount  collected,  less  a  small  collection  charge.  If  the  draft 
is  not  paid  upon  presentation,  it  will  be  returned  to  Anderson  Bros. 


122  BUSINESS  FORMS  AND  VOUCHERS. 

§  94.  A  Trade  Acceptance  is  defined  by  the  Federal  Reserve  Board  as 
"a  bill  of  exchange  (time  draft)  drawn  by  the  seller  on  the  purchaser  of  goods 
sold,  and  accepted  by  such  purchaser,"  this  acceptance  being  made  on  the  date 
of  purchase  or  within  a  few  days  thereafter.  The  trade  acceptance  is  in  the  form 
of  a  draft,  but  it  dififers  from  a  draft  in  that  it  is  accepted  by  the  drawee  at  the  time 
the  merchandise  is  purchased,  while  the  acceptance  of  a  draft  is  usually  after 
the  debt  is  due,  as  shown  by  the  drawer's  account  with  the  drawee.  Trade  ac- 
ceptances and  the  accounting  procedure  in  connection  therewith  are  discussed 
more  fully  in  a  subsequent  chapter. 

§  95.  Use  of  Drafts.  Sight  drafts  are  used  for  collecting  past-due  debts 
from  out-of-town  customers,  and  for  collecting  "collect  on  delivery"  freight  ship- 
ments. Time  drafts  are  used  for  collecting  past-due  debts  from  out-of  town  cus- 
tomers, and  for  changing  an  account  to  a  written  promise  to  pay  at  a  designated 
time.  Trade  acceptances  are  used  to  secure  written  evidence  of  a  sale  at  the  time 
the  sale  is  made. 

September  lO  Robert  Anderson  &  Co.,  Chicago,  sell  merchandise  to  James  Cowan,  Louisville, 
on  thirty  days'  time.  Mr.  Cowan  fails  to  send  remittance  when  the  debt  is  due  October  lo,  and 
Robert  Anderson  &  Co.  undertake  to  make  collection  by  drawing  a  sight  or  time  draft  on  him,  pay- 
able to  the  First  National  Bank  in  Louisville.  When  this  draft  is  presented,  Mr.  Cowan  will  either 
pay  the  (sight)  draft  or  accept  the  (time)  draft.  If  it  is  a  sight  draft  and  paid,  the  First  National 
Bank  will  send  Robert  Anderson  &  Co.  a  cashier's  check  or  bank  draft  in  payment;  if  it  is  a  time 
draft  and  accepted,  the  bank  will  follow  the  company's  instructions  in  regard  to  retaining  it  for 
collection  or  sending  it  to  them. 

September  15  Robert  Anderson  &  Co.  sell  Albert  Baker,  Springfield,  merchandise  on  ninety 
days'  time.  October  10  Robert  Anderson  &  Co.  find  that  it  will  be  necessary  for  them  to  borrow 
money  from  the  bank.  They  write  Albert  Baker  for  the  privilege  of  drawing  a  sixty-day  draft  for 
the  amount  of  his  indebtedness.  It  is  quite  probable  that  he  will  have  no  objections  to  accepting 
the  draft  because  it  does  not  change  the  time  of  paying  his  obligation.  If  he  accepts  the  draft,  Rob- 
ert Anderson  &  Co.  will  have  a  written  statement  of  the  amount  he  owes  and  can  discount  this  at 
the  bank  and  thus  secure  the  money  which  it  needs. 

§  96.  Endorsement  of  Drafts.  The  only  reason  for  any  writing  on  the 
back  of  a  draft  is  to  transfer  title  or  to  authorize  collection.  If  the  payee  is  a  bank 
located  in  the  same  city  as  the  drawer,  the  endorsement  will  be  for  collection  as 
explained  in  §  85,  ^  4,  to  transfer  it  to  a  bank  in  the  city  where  the  drawee  is 
located.  Several  endorsements  might  be  necessary  in  case  the  collecting  bank 
sends  it  through  banks  with  which  it  does  business;  the  form  of  endorsement  in 
each  case  would  be  the  same  as  that  described  in  §  85,  ^4.  In  case  the  holder 
of  an  accepted  time  draft  wishes  to  sell  it,  the  endorsement  would  be  "in  full" 
as  explained  in  §  84,  ^  5. 

In  the  first  illustration  given  in  §  95,  no  endorsement  would  be  required  on  the  sight  or  time 
draft  in  favor  of  the  Louisville  bank.  If  either  the  sight  or  time  draft  had  been  drawn  in  favor  of 
the  Corn  Exchange  National  Bank  of  Chicago,  it  would  have  been  necessary  for  this  bank  to  send 
it  to  the  Louisville  bank  for  collection.    The  endorsement  would  be  as  illustrated  in  §  85,  %  4. 

When  Robert  Anderson  &  Co.  discounted  the  acceptance  of  Albert  Baker,  described  in  the 
second  illustration  given  in  §  95,  the  endorsement  would  be  "in  full"  as  explained  in  §  85,  ^  2. 

§  97.  Effect  of  Drafts  on  the  Bookkeeping  Records.  When  the  owner 
of  a  business  draws  a  draft  on  an  out-of-town  customer,  he  retains  a  record  of 
the  draft  through  the  stub  from  which  it  was  detached.  Since  he  does  not  know 
that  the  customer  will  pay  the  (sight)  draft  or  accept  the  (time)  draft  upon  pre- 
sentation, no  additional  record  is  needed  in  regard  to  the  draft.  When  the  payee 
advises  him  of  the  drawee's  action  in  regard  to  the  draft,  he  indicates  the  result 
on  the  stub  from  which  the  draft  was  detached.  When  the  drawee  accepts  a  time 
draft  a  record  of  this  is  made  in  the  general  journal  because  the  indebtedness  is 
now  in  the  form  of  a  written  agreement  (the  acceptance  indicating  this)  and  the 
open  account  is  canceled  thereby.  The  value  received  is  the  draft,  hence  the  ac- 
count with  accepted  drafts  (§  102,  ^  i)  is  debited;    the  value  parted  with  is  the 


BUSINESS  FORMS  AND  VOUCHERS.  123 

account  with  the  customer  (§  27,  ^f  2),  hence  it  is  credited.  When  the  drawee  pays 
a  sight  draft  upon  presentation,  the  payee  will  send  the  drawer  a  cashier's  check  or 
bank  draft  in  payment  for  the  draft,  the  draft  having  been  left  with  the  payee  as 
a  receipt.  When  this  remittance  is  received  by  the  drawer,  the  customer  is  given 
credit  on  the  receipts  side  of  the  cash  book  in  the  same  manner  as  if  he  had  sent 
his  check  in  payment  of  the  account. 

When  the  business  pays  a  sight  draft  drawn  on  it  by  a  creditor,  the  same  entry 
is  made  in  the  cash  book  as  if  a  check  had  been  sent  direct  to  the  creditor  in  pay- 
ment of  his  account.  W^ien  the  business  accepts  a  time  draft  drawn  on  it  by  a 
creditor,  an  entry  is  required  in  the  general  journal ;  the  account  with  the  creditor 
(§  28,  ^  i)  is  debited  because  it  is  canceled,  and  the  account  which  is  to  show  a 
record  of  written  promises  to  pay  (§  103,  T|  2)  is  credited  because  this  account 
will  show  the  indebtedness  until  it  is  paid. 

§  98.  Protest.  Each  person  or  business  concern  whose  name  appears  as 
an  endorser  on  any  commercial  paper  (for  instance,  check,  note,  or  draft)  guar- 
antees payment  provided  the  holder  will  first  present  the  paper  to  the  one  who 
is  responsible  for  payment  and  thus  endeavor  to  make  collection.  The  law  pro- 
vides that  the  only  evidence  the  holder  can  use  as  a  defense  in  a  case  of  court  ac- 
tion is  the  protest  by  a  notary  public.  This  protest  is  a  form  which  the  notary 
public  sends  to  each  endorser  after  he  has  presented  the  paper  to  the  one  respon- 
sible for  its  payment  and  payment  has  been  refused. 

The  Starr  Piano  Co.  sells  the  note  received  from  the  Acme  Amusement  Co.  (Illustration  "c" 
in  §  87)  to  the  First  National  Bank,  endorsing  the  note  as  evidence  of  transfer.  On  the  date  the 
note  falls  due,  the  bank  presents  it  at  the  office  of  the  Acme  Amusement  Co.  and  demands  payment 
from  the  official  who  signed  the  note;  payment  is  refused.  The  note  is  given  to  a  notary  public  and 
he  presents  it  to  the  same  official.  If  payment  is  still  refused,  he  notifies  the  Starr  Piano  Co.  on  the 
proper  legal  form.  Unless  the  bank  had  taken  this  procedure,  the  Starr  Piano  Co.  would  have  been 
relieved  of  the  responsibility  of  making  payment,  and  the  bank  would  have  lost  the  amount  unless 
it  could  collect  from  the  Acme  Amusement  Co. 

Exercise  No.  47,  Order,  Sales  Invoice,  Acceptance,  and  Cashier's  Check. 

May  10  the  Davis  Printing  Company,  Pittsburgh,  placed  an  order  with  Ault 
&  Wiborg,  Cincinnati,  manufacturers  of  printer's  ink,  for  150  lbs.  of  printer's  ink 
(black)  at  $1.25,  and  75  lbs.  of  printer's  ink  (blue)  at  S1.50.  May  15  Ault  &  Wiborg 
acknowledged  receipt  of  this  order  by  an  invoice.  The  merchandise  was  billed  net 
30  days  and  shipped  via  Steamer  Queen  City.  The  Davis  Printing  Company  had 
not  paid  this  invoice  June  15  and  Ault  &  Wiborg  drew  a  draft  at  ten  days'  sight, 
payable  to  the  Mellon  National  Bank  in  Pittsburgh,  and  sent  the  draft  to  it  for 
acceptance  and  collection.  The  bank  presented  the  draft  May  17  and  the  Davis 
Printing  Company  accepted  it.  May  25  the  bank  notified  the  Davis  Printing 
Company  that  the  draft  was  due  May  27.  The  Davis  Printing  Company  paid  the 
draft  by  check  on  the  Mellon  National  Bank  the  day  it  was  due.  The  bank  sent 
a  cashier's  check  for  the  amount  of  the  draft  less  $1.00  collection  charges  May  28. 

Prepare  the  purchase  order  which  the  purchasing  agent  for  the  Davis  Printing 
Company  would  issue,  the  sales  invoice  which  the  bookkeeper  for  Ault  &  Wiborg 
would  make,  the  draft  which  the  bookkeeper  for  Ault  &  Wiborg  would  draw,  the 
acceptance  which  the  bookkeeper  for  the  Davis  Printing  Company  would  make 
on  this  draft,  and  the  cashier's  check  which  the  cashier  of  the  Mellon  National 
Bank  would  send  to  Ault  &  Wiborg. 

Exercise  No.  48,  Order,  Sales  Invoice,  Sight  Draft,  and  Cashier's  Check. 

September  25  the  Starr  Piano  Co.,  Chicago,  sold  the  Jones  Piano  Co.,  Mil- 
waukee, 100  Victrola  records  at  51c,  terms  30  days;  shipment  was  made  via  Amer- 
ican Railway  Express,  charges  collect.  October  28  the  bookkeeper  for  the  Starr 
Piano  Co.  drew  a  sight  draft  on  the  Jones  Piano  Co.  for  the  amount  of  this  invoice 


124  BUSINESS  FORMS  AND  VOUCHERS. 

payable  to  the  First  National  Bank  in  Chicago,  and  left  it  with  the  bank  for  col- 
lection. The  bank  sent  the  draft  to  the  Second  National  Bank  in  Milwaukee  with 
instructions  to  present  it  to  the  Jones  Piano  Co.  for  payment.  The  draft  was  paid 
by  John  Nash,  an  employee  of  the  Jones  Piano  Co.,  upon  presentation  by  a  clerk 
of  the  Milwaukee  bank,  and  the  Milwaukee  bank  sent  the  Chicago  bank  a  cashier's 
check  for  $50.75,  retaining  25c  for  collecting  the  draft.  The  Chicago  bank  notified 
the  Starr  Piano  Co.  that  the  draft  had  been  collected  and  their  account  credited 
with  $50.75,  the  proceeds  of  the  draft. 

Prepare  the  purchase  order  which  the  purchasing  agent  for  the  Jones  Piano 
Co.  would  issue,  the  sales  invoice  which  the  clerk  for  the  Starr  Piano  Co.  would 
make,  the  draft  which  the  bookkeeper  fpr  the  Starr  Piano  Co.  would  draw,  and  the 
cashier's  check  which  the  First  National  Bank  of  Chicago  would  receive  from  the 
Second  National  Bank  of  Milwaukee.  Show  the  endorsement  which  the  Chicago 
bank  would  make  on  the  draft  before  sending  it  to  the  Milwaukee  bank,  and  the 
entry  the  Chicago  bank  would  make  in  the  pass  book  of  the  Starr  Piano  Co.  for 
the  cashier's  check  received  in  payment  for  the  draft. 

Exercise  No.  49,  Notes,  Time  Drafts,  Sight  Drafts,  Bank  Drafts,  and  Checks. 

The  following  transactions  in  connection  with  notes  and  drafts  were  completed 
by  the  Central  Hardware  Company  of  Buffalo  during  July  and  August: 

July  I.  Received  from  Trowe  Bros.,  Watertown,  in  full  of  account,  a  note  for 
$525-65,  dated  June  29,  due  in  two  months,  with  interest  at  6% 
after  maturity,  payable  at  the  First  National  Bank  of  Watertown. 

July  28.  Accepted  a  draft  drawn  July  26  by  the  Harding  Mfg.  Co.,  Little  Falls, 
for  $1,214.60,  payable  at  thirty  days'  sight.  This  draft  was  drawn 
in  favor  of  the  Citizens  National  Bank,  Little  Falls,  and  sent  by  this 
bank  to  the  Third  National  Bank  of  Buffalo,  which  presented  it  for 
acceptance. 

Aug.  17.  Paid  by  check  on  the  Third  National  Bank  of  Buffalo  a  sight  draft  for 
$275.60,  drawn  by  Rand  &  Co.,  Cleveland,  Ohio,  August  15. 

Aug.  27.  Gave  the  Third  National  Bank  of  Buffalo  a  check  for  $1,214.60  in  pay- 
ment for  a  bank  draft  drawn  on  the  Chase  National  Bank,  New  York 
City,  for  the  same  amount,  and  sent  this  draft  to  the  Harding  Mfg. 
Co.,  Little  Falls,  in  payment  for  the  acceptance  of  July  28. 

Aug.  31.  Received  from  Trowe  Bros,  a  new  note,  dated  July  29,  with  interest  at 
6%  from  date,  due  in  two  months,  payable  at  the  First  National 
Bank  of  Watertown,  and  a  cashier's  check  for  $300.00  drawn  on  the 
First  National  Bank  of  Watertown  by  M.  A.  Rand,  cashier,  in  our 
favor,  in  payment  for  their  note  due  today. 

Prepare  the  following  business  forms: 

The  note  required  in  the  transaction  of  July  i. 

The  draft  required  in  the  transaction  of  July  28,  with  all  endorsements. 

3.  The  draft  and  check  required  in  the  transaction  of  August  17. 

4.  The  check  and  bank  draft  required  in  the  transaction  of  August  27. 

The  note  and  cashier's  check  required  in  the  transaction  of  August  31; 
the  new  note  should  be  made  payable  at  the  same  bank  as  the  one  renewed. 

QUESTIONS 

I.     Would  the  Home  Department  Store,  Pittsburgh,  draw  a  sight  draft  on  C.  A. 
Fades,  1262  Penn  Ave.,  Pittsburgh,  to  collect  a  debt  due  from  him?     Why? 


QUESTIONS  ON  BUSINESS  FORMS  AND  VOUCHERS.  125 

2.  Would  this  concern  accept  a  note  in  settlement  of  the  account? 

3.  U.  B.  Sweet  owes  the  Candy  Kitchen  an  account  of  $100.00  and  secures  an 

extension  of  sixty  days  by  giving  his  note  for  this  amount,  due  at  the  ex- 
piration of  that  time,  (a)  Have  his  liabilities  decreased?  (b)  Have  the 
assets  of  the  Candy  Kitchen  increased?     (c)  To  whom  will  the  note  be  paid? 

4.  Why  should  a  draft  be  made  payable  to  the  bank  at  which  the  drawee  does 

business? 

5.  Would  you  consider  it  fair  for  one  of  your  creditors  to  draw  a  sight  or  time 

draft  on  you  for  an  amount  you  owed  without  first  notifying  you? 

6.  Is  it  necessary  for  the  drawee  of  a  draft  to  pay  or  accept  it  when  presented? 

Why? 

7.  In  what  respects  is  a  sight  draft  similar  to  a  check? 

8.  In^what  respects  is  an  accepted  time  draft  similar  to  a  note? 

9.  If  you  sell  merchandise  to  a  customer  in  another  city,  how  will  you  expect  him 

to  pay  for  the  merchandise? 

10.  Would  you  consider  it  fair  for  this  customer  to  send  you  a  draft  drawn  on  one 

of  his  customers  in  your  city,  asking  you  to  collect  your  debt  from  this  cus- 
tomer? 

11.  How  does  the  drawee  of  a  time  draft  indicate  that  he  will  pay  the  amount  of 

the  draft? 

12.  How  does  the  drawee  of  a  sight  draft  indicate  that  he  will  pay  the  amount 

of  the  draft? 

13.  Explain  the  use  of  notes  and  drafts  in  business. 

14.  If  the  drawee  pays  a  sight  draft,  what  accounts  are  debited  and  credited? 

15.  If  the  drawee  accepts  a  time  draft,  what  account  shows  the  value  received? 

the  value  parted  with? 

16.  What  accounts  are  affected  when  the  owner  of  the  business  accepts  a  note 

from  a  customer  in  full  of  account? 

17.  Name  the  accounts  debited  and  credited  when  the  business  issues  a  note  (a) 

for  borrowed  money,  and  (b)  to  pay  a  creditor. 

18.  What  accounts  represent  the  value  received  and  the  value  parted  with  to  the 

drawee  of  an  accepted  draft?    To  the  drawer? 

19.  Why  is  a  draft  endorsed?     a  note?     a  check? 

20.  Distinguish  between  the  face  value  and  maturity  value  of  a  note. 

21.  If  John  Smith  transfers  a  check  to  you  by  endorsement  and  the  bank  refuses 

payment  of  the  check  because  the  one  who  drew  it  did  not  have  sufficient 
funds  on  deposit,  how  would  you  notify  John  Smith  of  the  bank's  action 
so  as  to  hold  him  responsible  for  the  amount  of  the  check? 

22.  Why  is  it  advisable  to  have  the  receipt  of  part  payment  for  a  note  endorsed 

on  the  back  instead  of  acknowledged  by  a  separate  receipt? 

23.  Why  is  it  advisable  for  the  holder  of  the  note  not  to  write  his  name  in  con- 

nection with  the  endorsement  of  a  receipt  for  part  payment? 

24.  Explain  the  difTerence  between  a  note  and  a  check. 

25.  Whom  does  the  holder  of  a  note  hold  responsible  for  its  payment? 


Chapter  XII 

ACCOUNTS    WITH    FIXED   ASSETS,    NOTES,    AND    INTEREST 

The  Purpose  of  this  Chapter  is  to  explain  accounts  with  fixed  assets,  notes 
and  interest.  A  knowledge  of  these  accounts  is  necessary  because  they  are  needed 
in  the  recording  of  business  transactions.  Equipment  is  needed  in  connection 
with  the  operations  of  the  business;  transactions  frequently  occur  involving  the 
use  of  notes  and  drafts;    and  interest  cost  and  interest  income  must  be  recorded. 

§  99.  Fixed  Assets.  The  building  or  place  in  which  the  business  conducts 
its  operations  usually  requires  certain  fixtures  necessary  in  connection  with  the 
operations  of  the  business;  these  include  shelving,  show  cases,  desks,  typewriters, 
filing  cases,  etc.  This  property,  when  purchased,  becomes  a  part  of  the  assets 
of  the  business;  such  assets  are  usually  referred  to  as  "fixed  assets"  to  distinguish 
them  from  "current  assets,"  such  as  cash,  merchandise  in  stock,  accounts  due 
from  customers,  etc.  The  value  of  property  purchased  for  use  in  the  busi- 
ness is  recorded  in  a  special  account  or  accounts,  in  such  a  way  that  the  cost  value 
of  the  property  will  always  be  shown;  the  balance  should  show  cost  to  facilitate 
insurance  adjustment  in  case  of  fire  and  to  determine  the  yearly  depreciation 
which  is  based  on  the  cost.  The  Furniture  and  Fixtures  account  is  the  only  fixed 
asset  account  discussed  in  this  chapter;  a  more  complete  discussion  will  be  given 
in  a  subsequent  chapter. 

FURNITURE  AND  FIXTURES  ACCOUNT 
§  100.  The  Purpose  of  this  Account  is  to  show  the  cost  value  of  prop- 
erty purchased  for  use  in  the  office  and  store  room,  which  includes  desks,  filing 
cabinets,  typewriters,  show  cases,  scales,  etc.  A  permanent  record  of  each  article 
purchased  should  be  kept,  either  in  the  explanation  column  of  the  account  or 
in  a  separate  inventory  book. 

Debit  the  Furniture  and  Fixtures  Acct.:  Credit  the  Furniture  and  Fixtures  Acct.: 

*\  I.     For  the  value  of  furniture  and  ^  2.     For  the  cost  value  of  furniture 

fixtures   on   hand   at   the   be-  or   fixtures   sold,    the   cost   of 

ginning   of   business,    and    for  which  was  debited  to  this  ac- 

the  cost  value  of  such  prop-  count  when  purchased, 

erty  purchased. 

\  3.  The  Balance  of  the  Furniture  and.  Fixtures  Account  shows  the  cost  value 
of  the  furniture  and  fixtures  owned  by  the  business*  as  the  result  of  transactions 
in  which  furniture  and  fixtures  were  purchased  or  sold.  It  is  shown  on  the  Balance 
Sheet  as  one  of  the  "Fixed  Assets." 

§  101.  Transactions  with  Notes  and  Accepted  Drafts  require  accounts 
in  which  to  record  them.  The  reason  for  this  is  that  a  note  is  a  written  agreement, 
while  the  amount  in  an  account  is  subject  to  dispute  even  though  it  may  be  sup- 
ported by  business  forms.  Thus  the  account  with  James  Atkin  may  show  a  debit 
balance  of  $250.00,  but  this  does  not  mean  that  Mr.  Atkin  will  pay  $250.00  be- 
cause there  might  have  been  an  error  in  recording  the  amount.  On  the  other  hand, 
if  James  Atkin  has  given  the  business  a  written  promise  to  pay  $250.00  on  a  defi- 
nite date,  this  is  not  subject  to  dispute  as  he  will  be  required  to  pay  this  amount. 

(Concluded  on  page  127.) 

♦The  nature  of  the  property  will  determine  the  method  of  taking  care  of  the  decrease  in  value 
due  to  wear  and  tear  resulting  from  use;  this  is  explained  in  a  subsequent  chapter  under  the  subject 
of  "Depreciation." 

126 


ACCOUNTS  WITH  NOTES.  127 

Should  the  written  promise  remain  in  possession  of  the  business  and  errors  de- 
velop which  change  the  amount,  credit  might  be  allowed  for  these  errors;  but. 
if  the  business  has  sold  the  note,  the  holder  will  expect  Mr.  Atkin  to  pay  the  full 
amount.  For  the  reasons  stated,  it  is  customary  to  record  the  amount  of  each 
written  promise  (note  or  acceptance)  in  which  money  is  to  be  paid  to  the  business, 
in  a  "Notes  Receivable"  account,  and  each  written  promise  (note  or  acceptance) 
in  which  the  business  promises  to  pay  money,  in  a  "Notes  Payable"  account. 

NOTES  RECEIVABLE  ACCOUNT 
§  102.     The  Purpose  of  this  Account  is  to  show  the  amount  due  to  the 
business  as  evidenced  by  written  obligations;    these  include  notes   (§  86)   signed 
by  others  and  time  drafts  (§  92)  accepted  by  others. 

Debit  the  Notes  Receivable  Account:  Credit  the  Notes  Receivable  Account: 

^  I.     For   the    face   of   each    note   or  ^  2.     For   the    face   of   each    note   or 

acceptance*     owned     by     the  acceptance*    when    collected, 

business  at  the  beginning,  and  discounted!,     or     transferred, 

for  the  face  of  each  note  or  Partial     payments    are    indi- 

acceptance*    received    during  cated  as  in  §  27,  ^  5. 
the  operations  of  the  business. 

%  3.  The  Balance  of  the  Notes  Receivable  Account  shows  the  value  of  the 
notes  and  acceptances  belonging  to  the  business  as  the  result  of  transactions  com- 
pleted with  notes  and  drafts  receivable.  It  is  shown  on  the  Balance  Sheet  as  a 
current  asset,  and  is  usually  listed  between  "Cash"  and  "Accounts  Receivable." 

NOTES  PAYABLE  ACCOUNT 
§  103.     The  Purpose  of  this  Account  is  to  show  the  amount  owed  by  the 
business  as  evidenced  by  written  obligations;    these  include  notes  (§  86)  signed 
by  the  business  and  time  drafts   (§  92)   accepted  by  the  business. 

Debit  the  Notes  Payable  Account:  Credit  the  Notes  Payable  Account: 

1[  I.     For   the    face   of   each    note   or  1[  2.     For   the   face   of   each    note   or 

acceptance  when  paid.      Par-  acceptancef  owed  by  the  busi- 

tial  payments  are  indicated  as  ness  at  the  beginning,  and  for 

in  §  28,  ^  5.  the  face  of  each   note  signed 

or  time  draft  accepted |  by  the 
business  during  its  operations. 

^  3.  The  Balance  of  the  Notes  Payable  Account  shows  the  value  of  the 
notes  and  acceptances  owed  by  the  business  as  the  result  of  transactions  completed 
with  notes  and  drafts  payable.  It  is  shown  on  the  Balance  Sheet  as  a  current  lia- 
bility, and  is  usually  listed  before  "Accounts  Payable." 

§  104.  Interest  is  the  use  of  money.  The  premium  paid  or  received  for 
this  use  is  also  referred  to  as  interest.  To  illustrate:  A  borrowed  $100.00  from 
B  on  twelve  months'  time,  and  at  the  end  of  the  year  paid  $106.00,  the  principal 
and  the  interest.  A  paid  $6.00  for  the  use  of  the  money  borrowed,  hence  this 
artiount  is  an  interest  cost  to  him;  B  received  $6.00  for  the  use  of  the  money  loaned, 
hence  this  amount  is  interest  earned  for  him. 

*Trade  acceptances  are  usually  shown  in  an  account  with  Trade  Acceptances  Receivable; 
this  is  discussed  in  a  subsequent  chapter. 

flf  notes  and  drafts  discounted  are  credited  to  a  Notes  Receivable  Discounted  account, 
Notes  Receivable  is  not  credited  until  they  are  paid;   this  is  discussed  in  a  subsequent  chapter. 

JTrade  acceptances  are  usually  shown  in  an  account  with  Trade  Acceptances  Payable;  this 
is  discussed  in  a  subsequent  chapter. 


128  ACCOUNTS  WITH  INTEREST 

^  I.  Discount  is  interest  paid  in  advance,  that  is,  the  one  who  borrows  the 
money  pays  the  lender  the  interest  at  the  time  the  loan  is  made  and  not  at  its 
maturity.  It  is  customary  with  many  banks  to  deduct  the  interest  from  the  face 
of  notes  received  as  evidence  of  loans;  the  borrower  receives  cash  or  credit  in 
his  pass  book  for  the  proceeds.  The  borrower  may,  if  he  desires,  give  the  bank 
his  check  for  the  interest,  in  which  case  he  receives  credit  for  the  face  of  the  note. 

To  illustrate:  A  borrowed  $500.00  from  his  bank,  giving  his  note  payable  in  ninety  days  from 
date,  as  evidence  of  the  obHgation.  The  bank  charges  him  eight  per  cent  interest.  When  he  pre- 
sents his  note  for  credit,  he  will  either  receive  credit  for  $490 .00,  or  give  the  bank  his  check  for  $10 .00 
and  receive  credit  for  $500.00.  In  either  case  the  $10.00  is  regarded  as  interest.  Interest  paid  in 
advance  may  be  termed  "discount,"  but  it  is  better  to  consider  all  amounts  paid  for  the  use  of  money 
as  "interest,"  whether  the  amounts  are  paid  at  the.time  the  debt  is  created  or  at  the  time  it  is  paid. 

\  2.  Legal  Rate.  To  prevent  unreasonable  charges  for  the  use  of  money, 
the  various  states  have  enacted  laws  fixing  the  rate  that  may  be  collected;  this  is 
termed  the  legal  rate.  Some  states  provide  that  a  higher  rate  may  be  collected 
if  mentioned  in  the  contract;  this  is  termed  the  contract  rate.  Both  the  legal 
and  the  contract  rate  are  based  on  a  fixed  charge  for  one  year;  thus  6%  indicates 
that  $6.00  may  be  collected  for  each  $100.00  for  one  year. 

^  3,  Time.  The  time  is  the  number  of  da^^s,  months  or  years  for  which 
interest  is  to  be  calculated.  In  the  case  of  a  note  the  time  is  stated.  A  note  dated 
March  10,  due  in  90  days,  would  be  due  June  8.  The  same  note  if  payable  in  three 
months  would  be  due  June  10. 

^  4.  Method  of  Calculating  Interest.  A  business  year  is  regarded  as  360 
days' — 12  months,  30  days  in  each  month.  Since  6%  is  the  legal  rate  in  the  majority 
of  states,  and  it  is  an  aliquot  part  of  60,  there  are  many  rules  for  calculating  interest 
based  on  this.  One  of  the  simplest  methods,  especially  where  the  time  is  less  than 
100  days,  is  as  follows:  multiply  the  principal  with  the  decimal  place  moved  three 
places  to  the  left  by  the  result  obtained  by  dividing  the  number  of  days  by  six. 
The  result  is  the  interest  at  6%. 

To  illustrate:  Calculate  the  interest  on  $942.75,  for  48  days,  at  six  per  cent.  Move  the  decimal 
point  three  places  to  the  left,  multiply  this  amount  by  8  (48  divided  by  6).  The  result  is  754,200. 
As  there  are  five  decimal  places  in  the  multiplicand,  there  must  be  five  decimal  places  in  the  product, 
which  gives  the  interest,  $7.54.  The  fraction  to  the  right  of  this  is  less  than  one-half,  and  is  not  used. 
If  it  had  been  one-half  or  more,  the  interest  would  have  been  $7.55.  Do  not  drop  the  fraction  until 
the  final  result  is  obtained. 

When  the  rate  of  interest  is  not  6%,  divide  the  amount  of  the  interest  at  6%  by  six;  this  gives 
the  interest  at  i  %.  Multiply  this  by  the  given  rate,  and  the  result  is  the  interest  on  the  given  amount 
at  the  given  rate.  To  illustrate:  Calculate  the  interest  on  $368.95  for  48  days,  at  8%:  $368.95 
with  the  decimal  point  moved  three  places  to  the  left  is  .36895.  48-^-6  =  8;  .36895X8  =  2.95160 
(interest  at  6%).  2.95160 -J-6  =  .49193  (interest  at  1%);  .49193X8  =  3.93544  or  $3.94,  interest  on 
J.95  for  48  days,  at  8%. 


§  105.  Accounts  with  Interest.  Interest  cost  and  interest  earned  should 
be  recorded  in  separate  accounts  While  all  the  transactions  with  interest  could 
be  recorded  in  one  account,  debiting  it  with  interest  cost  and  crediting  it  with 
interest  earned,  yet  it  is  better  to  keep  two  accounts  because  the  balance  of  the 
one  account  would  not  mean  anything  to  the  owner  of  the  business.  Where  the 
transactions  with  interest  are  recorded  in  two  accounts,  the  information  given 
the  owner  on  the  Statement  of  Profit  and  Loss  will  show  the  net  interest  cost  to  hirji 
separate  from  the  net  interest  earned;  if  the  transactions  had  all  been  recorded 
in  one  account,  the  balance  would  not  show  this  information,  but  only  the  differ- 
ence between  the  total  interest  cost  and  the  total  interest  earned.  For  the  rea- 
son stated  it  is  customary  to  record  interest  transactions  in  which  the  business 
gives  cash  or  other  property  for  interest,  in  an  account  with  "Interest  Cost," 
and  those  transactions  in  which  the  business  receives  cash  or  other  property  for 
interest,   in  an  account  with   "Interest   Earned." 


GENERAL  RULE  FOR  DEBITS  AND  CREDITS  129 

INTEREST  COST  ACCOUNT 

§  106.  The  Purpose  of  this  Account  is  to  show  the  cost  of  interest  to 
the  business,  made  necessary  by  the  business  having  to  pay  for  the  use  of  money. 

Debit  the  Interest  Cost  Account:  Credit  the  Interest  Cost  Account: 
^  I.     For    interest    on    accounts    and  If  2.     For   any   deductions   which    re- 
notes  payable.*     Cash  is  us-  duce   the   cost  of   interest   as 
ually  credited,  but  some  other  shown  by  the  debit  side, 
asset  might  be  given  in  pay- 
ment of  interest. 

^  3.  The  Balance  of  the  Interest  Cost  Account  shows  the  net  cost  of  interest 
to  the  business.  It  is  shown  on  the  Statement  of  Profit  and  Loss  as  Interest  Cost 
under  the  caption   "Deductions  from  Income." 

INTEREST  EARNED  ACCOUNT 

§  107.  The  Purpose  of  this  Account  is  to  show  the  returns  from  interest 
to  the  business,  resulting  from  others  paying  for  the  use  of  money  which  belongs 
to  the  business. 

Debit  the  Interest  Earned  Account:  Credit  the  loiter  est  Earned  Account: 

%  I.     For  any  deductions  which  reduce  ^2.     For    interest    income    from    ac- 

the   income   from   interest   as  counts  and  notes  receivable.! 

shown  by  the  credit  side.  Cash  is  usually  debited,   but 

some    other    asset    might    be 
received  for  interest  earned. 
T[  3.     The  Balance  of  the  Interest  Earned  Account  shows  the  net  returns  from 
interest  to  the  business.    It  is  shown  on  the  Statement  of  Profit  and  Loss  as  Interest 
Earned  under  the  caption  "Other  Income." 

SUMMARY 

§  108.  General  Rule  for  Debits  and  Credits.  Debit  the  account  which 
represents  the  value  received  and  credit  the  account  which  represents  the  value 
parted  with.    This  rule  may  be  more  explicitly  expressed  as  follows: 

Debit  the  Account  which  represents:  Credit  the  Account  which  represents: 

(a)     The    cash    received    or    property  (d)     The  cash  paid  or  property  sold, 

purchased.  (e)     The  person   from  whom   cash   is 

(&)     The  person  to  whom  cash  is  paid  received    or    property    is    pur- 

or  property  is  sold  on  account.  chased  on  account. 

(c)      The    service    for   which    cash    or  (/)      The    service    for   which    cash    or 

other  property  is  given  in  pay-  other  property  is  received, 

ment. 
The  above  rule  was  not  given  at  the  beginning  because  the  student  might 
have  felt  obligated  to  memorize  it,  and  this  is  not  desirable.    It  is  given  at  this  time 
in  order  that  the  student  may  correlate  it  with  the  preceding  discussion  and  his 
knowledge  of  the  principles  gained  from  the  exercises  and  practice  set. 

In  the  formula  given,  (a)  applies  to  ^i  under  the  discussion  of  the  Cash, 
Purchases,  Notes  Receivable,  and  Furniture  and  Fixtures  accounts;  (b)  to  1[i 
under  the  discussion  of  the  Accounts  Payable  and  Accounts  Receivable  accounts, 

(Concluded  on  page  ijo.) 
*Accrued  interest  on  accounts  payable,  notes  payable,  and  bonds  payable  will  be  discussed  later. 
fAccrued  interest  on  accounts  receivable,  notes  receivable,  and  bonds  owned  by  the  business 
will  be  discussed  later. 


130 


OUTLINE  OF  ACCOUNTS. 


and  to  ^  2  of  the  Capital  account;  (c)  to  1[i  of  the  Expense,  Interest  Cost,  and 
Interest  Earned  accounts;  (d)  to  H  2  of  the  Cash,  Sales,  and  Furniture  and  Fix- 
tures accounts;  (e)  to  1[  2  of  the  Accounts  Receivable  and  Accounts  Payable  ac- 
counts, and  to  H  4  of  the  Capital  account;  (f)  to  ^  2  of  the  Expense,  Interest  Cost 
and  Interest  Earned  accounts. 

The  student  should  learn  to  record  transactions  with  the  same  ease  that  the  driver  operates 
an  automobile.  He  can  do  this  only  by  constant  practice.  The  purpose  of  the  exercises  in  connec- 
tion with  the  discussion  and  the  practice  set  was  to  afford  this  practice.  The  first  thought  in  the 
mind  of  the  bookkeeper  when  a  transaction  is  presented  to  him  should  be  the  value  received  and 
the  value  parted  with;  the  second,  the  accounts  that  represent  these  values;  the  third,  the  book 
of  account  in  which  to  make  the  record;  and  the  fourth,  the  process  of  recording  so  as  to  show  these 
facts. 

OUTLINE  OF  ACCOUNTS 

§  109.  The  Outline  below  includes  those  accounts  which  have  been  dis- 
cussed in  the  preceding  chapters.  These  are  classified  as  current  assets,  fixed  assets, 
current  liabilities,  capital,  income,  operating,  and  special  profits  and  losses. 

'  Cash 
Merchandise  Inventory 
Notes  Receivable 
Accounts  Receivable 


Current  Assets. 


Fixed  Assets <  Furniture  and  Fixtures 


Current  Liabilities. 


f  Notes  Payable 
\  Accounts  Payable 


Capital I  Proprietor,  Capital 

[  Sales 

Trading  (Income) i  Purchases 

[  Merchandise  Inventory 

Operating  (Cost) <^  Expense 


Used  in  the  preparation  of 
the  Balance  Sheet 


Special  Profit  and  Loss,  s 


Interest  Earned 
Interest  Cost 


Used  in  the  preparation  of 
the  Statement  of  Profit 
and  Loss 


Current  Assets  are  those  assets  which  are  in  the  form  of  cash  or  which  will  be 
converted  into  cash  in  the  regular  operations  of  the  business;  they  are  usually 
the  result  of  transactions  in  connection  with  the  purchase  and  sale  of  the  commod- 
ities in  which  the  business  deals. 

Fixed  Assets  refer  to  the  property  purchased  for  use  in  the  business. 

Current  Liabilities  are  those  liabilities  which  will  have  to  be  paid  within  a 
short  time  after  they  are  incurred;  they  usually  represent  debts  incurred  in  con- 
nection with  the  purchase  of  merchandise. 

Capital  refers  to  the  investment  of  the  proprietor. 

Trading  or  Income  Accounts  are  those  accounts  which  show  the  profit  re- 
sulting from  the  operations  of  the  business.  Each  business  is  organized  to  make 
a  profit  through  certain  specific  operations,  as  selling  merchandise  (mercantile 
business),  selling  service  (telephone  business),  etc. 

Operating  Expenses  refer  to  the  cost  of  operating  the  business,  which  includes 
rent,  heat,  light,  telephone  service,  salaries,  etc. 

Special  Profits  and  Losses  refer  to  those  profits  and  losses  which  occur  out- 
side of  the  regular  operations  of  the  business  and  may  occur  in  one  fiscal  period 
but  not  in   another. 


EXERCISES  IN  NOTES  AND  DRAFTS.  131 

Exercise  No.  50,  Notes  and  Drafts. 

Record  in  journal  form  the  following  transactions  in  regard  to  notes  and 
drafts  completed  during  the  months  of  January — June  by  James  Whitcomb,  a 
dealer  in  farm  implements: 

Jan.      5.     Sold  Jonathan  Rigden,  Centerville,  one  tractor,  $850.00.       Received  in 

payment  his  check  for  $250.00  and  three  notes  for  $200.00  each,  due 

in  three,  six,  and  nine  months  respectively,  with  interest  at  6%  from 

date. 

10.     Purchased  from  the  Orrville  Mfg.  Co.,  Mansfield,  on  90   days'    time, 

merchandise  per  purchase  invoice  dated  January  7,  $1,295.60. 
15.     Sold  Robert  Shook,  Scottsboro,  on  30  days'  time,  farm  implements  per 

sales  invoice  rendered,  $425.00. 
22.     Accepted  the  Orrville  Mfg.  Co.'s  90-day  draft  for  $1,000.00  on  account 

of  purchase  of  the  loth. 
25.     Borrowed  $800.00  from   the  bank  on   Mr.   Whitcomb's  60-day  note, 
bearing  interest  at  6%.     Received  credit  in  the  pass  book  for  the 
face  of  the  note. 
31.     Sold  S.  W.  Walker,  Clinton,  on  30  days'  time,  farm  implements  per 
sales  invoice  rendered,  $209.75. 
Feb.     I.     Discounted  at  the  bank  the  three-months  note  received  from  Jonathan 
Rigden  January  5.    Received  credit  in  the  pass  book  for  the  face  of 
the  note. 

14.  Received  from  Robert  Shook  in  settlement  for  the  merchandise  sold  him 

January  15,  his  note  for  $300.00,  due  in  three  months,  with  interest, 
and  his  check  for  the  balance  of  the  account  plus  three  months' 
interest  on  the  note  at  8%. 
28.  Sold  W.  H.  Miller,  City,  one  tractor,  $1,050.00.  Received  in  payment 
his  check  for  $150.00  and  three  notes  for  $300.00  each,  due  in  three, 
six,  and  nine  months  respectively,  with  interest  at  6%  from  date. 
Mar.  8.  Drew  a  30-day  draft  through  the  Union  Bank  at  Clinton  on  S.  W.  Walker 
for  the  merchandise  sold  him  January  31.  Sent  the  draft  to  the  bank 
for  acceptance,  with  instructions  to  retain  it  for  collection  if  accepted. 

15.  Discounted  at  the  bank  the  three-  and  six-months  notes  received  from 

W.  H.  Miller  February  28.     Received  credit  in  the  pass  book  for 
$588.00,  the  proceeds  of  these  notes  after  the  bank  deducted  interest. 

16.  Received  notice  from  the  Union  Bank  at  Clinton  that  the  draft  drawn 

on  S.  W.  Walker  March  8  was  accepted  March  11,  and  the  bank 
would  hold  the  draft  for  collection  at  maturity  per  our  instructions. 

24.  Gave  the  bank  in  payment  for  the  note  discounted  January  25  a  new 

60-day  note  for  $500.00,  with  interest  from  date,  and  our  check  for 
the  balance  of  the  old  note  and  interest  on  same  at  6%  for  sixty  days. 

25.  Purchased  from  the  Orrville  Mfg.  Co.,  Mansfield,  on  90  days'  time, 

merchandise  per  purchase  invoice  dated  March  20,  $2,546.52. 
April    I.     Received  from  Jonathan  Rigden  a  check  for  $203.00  in  payment  for 
his  three-months  note  given  January  5  and  interest,  the  bank  having 
failed  to  send  him  a  notice. 
3.     Sold   M.   B.   Adams,   Uniontown,   one   thresher  with   full   equipment, 
$1,500.00.     Received  in  payment  $500.00  cash,  a  60-day  note  for 
$500.00,  and  a  90-day  note  for  $500.00,  each  with  interest  at  6%. 
14.     Received  a  cashier's  check  from  the  Union  Bank  at  Clinton  for  $208.50 
in  payment  for  the  draft  accepted  by  S.  W.  Walker,  less  $1.25,  their 
charges  for  collection. 


132 


EXERCISES  IN  NOTES  AND  DRAFTS 


10. 


15- 


Apr.    20.     Gave  our  bank  a  check  for  $498.58  and  the  60-day  note  received  from 
M,  B.  Adams  April  3,  in  settlement  for  the  90-day  draft  drawn  by 
the  Orrville  Mfg.   Co.  and  accepted  by  us  January  22;    the  bank 
accepted  the  Adams  note  at  its  present  value,  $501.42  (face  value, 
$500.00,  plus  interest  to  date,  $1.42). 
25.     Received  a  check  from  W.  H.  Miller  in  payment  for  the  nine-months 
note  received  February  28,  for  the  face  of  the  note  and  interest  from 
the  date  of  the  note  up  to  and  including  April  24. 
May     I.     Gave  the  Orrville  Mfg.  Co.  the  90-day  note  received  from  M.  B.  Adams 
April  3,  our  note  for  $1,000.00  due  in  ninety  days,  our  note  for 
$1,000.00  due  in  four  months,  and  our  check  for  $374.79  in  payment 
for  balance  due  on  the  purchase  invoice  of  January  10  and  in  full  of 
purchase  invoice  of  March  25,  and  interest  on  our  notes  at  6%  from 
date;    the  Orrville  Mfg.  Co.  accepted  the  Adams  note  at  its  present 
value,  $502.33  (face  value,  $500.00,  plus  interest  to  date,  $2.33). 
Sold  C.  H.  Becker,  Lexington,  one  thresher  and  outfit,  $1,800.00.     Re- 
ceived in  payment  his  check  for  $300.00,  and  three  notes  for  $500.00 
each,  due  in  30,  60,  and  90  days  respectively,  with  interest  at  6%. 
Purchased  from  the  Orrville  Mfg.  Co.,  Mansfield,  on  90  days'  time, 
merchandise  per  purchase  invoice  dated  May  12,  $1,365.90. 
18.     Sold   Robert  Shook,   Scottsboro,   one   tractor,   $850.00.      Received   on 
account  of  this  sale  his  check  for  $150.00  and  a  note  for  $600.00  in 
his  favor,  signed  by  B.  A.  Small,  dated  March  7  and  payable  in 
ninety  days.    Allowed  him  credit  for  the  proceeds  of  the  note,  which 
include  the  face  and  interest  at  6%  from  the  date  of  the  note  to  May 
18.    The  balance  of  this  account  is  to  be  paid  within  thirty  days. 
June     I.     The  bank  notified  us  that  the  three-months  note  for  $300.00  received 
from  W.  H.  Miller  February  28  and  later  discounted,  has  not  been 
paid.     Gave  the  bank  our  check  for  $4.50  interest  and  our  note  for 
$300.00,  with  interest  at  6%  from  date,  payable  in  thirty  days. 
Debit  the  account  with  W.  H.  Miller  for  the  face  of  the  note  plus  the  interest,  and 
credit  Notes  Payable  and  Cash. 

3.  Received  from  Robert  Shook  a  3-months  note  for  $200.00,  dated 
June  2,  and  a  check  for  $104.00  in  payment  for  3-months  note  dated 
February  14,  and  interest  on  the  new  note  at  8%  from  date  to 
maturity. 
12.  Received  from  C.  H.  Becker  his  check  for  $502.50  in  payment  for  30-day 
note  dated  May  10  and  interest  at  6%  on  the  same  from  date  of  the 
note  up  to  and  including  June  9. 


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Exercise  No.  51,  Sight  Draft. 


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John  C.  Franklin  of  Scranton,  Pa.,  owes  Dean  &  Dean  of  Salt  Lake  City  as 
shown  by  the  account  (in  the  ledger  of  John  C.  Franklin)  in  the  illustration 
above.     Dean  &  Dean  have  drawn  the  draft  at  the  top  of  page  133  in  settlement 


EXERCISES  IN  NOTES  AND  DRAFTS. 


133 


of  the  past  due  items  of  August  5  and  September  9,  with  interest  at  6%  from  the 
due  date  up  to  and  including  the  date  of  the  draft. 


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The  student  is  required  to  show  the  following: 

(i)     Interest  calculations  made  to  approve  the  amount  of  the  draft. 
(2)     The  entry  in  journal  form  that  the  drawee  would  make  when  he  paid 
the  draft. 

Exercise  No.  52,  Note  Transferred. 


w. 

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The  check  in  the  illustration  below  and  the  note  at  the  top  of  page  134  were 
received  in  full  payment  for  the  account  shown  in  the  illustration  above.  The 
customer  pays  interest  on  the  past-due  items  from  their  due  date  to  the  date  of 
settlement  as  shown  by  the  date  of  the  check;  he  is  allowed  the  accrued  interest 
in  the  note  from  date  up  to  and  including  the  date  of  settlement. 


134 


EXERCISES  IN  NOTES  AND  DRAFTS. 


The  student  is  required  to  show  the  following: 

(i)     Interest  calculations  made  to  approve  the  amount  of  the  check. 

(2)  Endorsement  to  transfer  the  note. 

(3)  The  entry  in  journal  form  required  to  close  the  account  and  show  a 
record  of  the  interest  and  note. 


Exercise  No.  53,  Time  Draft. 


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The  draft  in  the  illustration  below  was  drawn  in  settlement  for  the  balance 
of  the  sale  made  March  10  as  shown  by  the  debit  to  the  account  with  the  customer 
in  the  illustration  above.  Interest  at  6%  for  thirty  days  on  the  balance  due  was 
included  in  the  face  of  the  draft. 


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The  student  is  required  to  show  the  following:   i 

(i)     Interest  calculations  made  by  the  bookkeeper  when  he  ascertains  the 
amount  of  the  draft. 

{Concluded  on  page  133.) 


EXERCISES  IN  NOTES  AND  DRAFTS. 


135 


(2)  The  stub  from  which  the  draft  was  detached. 

(3)  The  entry  in  journal  form  made  by  the  bookkeeper  who  drew  the  draft. 

Exercise  No.  54,  Sight  Draft,  Note,  and  Check. 

The  illustration  below  shows  three  ledger  accounts  which  appear  in  the  ledger 
of  the  Cochran  Mfg.  Co.,  Toledo,  Ohio: 


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{Concluded  on  page  Ij6. 


136  JOURNAL  ENTRIES,  NOTES  AND  DRAFTS. 

The  following  is  required: 

(i)  Draw  at  sight  on  the  Auto  Radiator  Repair  Co.  for  the  balance  due  June 
1st,  including  interest  on  all  past  due  items,  less  interest  on  the  payments  up  to 
and  including  the  date  of  the  draft.  Make  the  draft  payable  to  one  of  the  banks  in 
the  city  in  which  the  school  is  located,  it  being  assumed  that  this  city  is  the  address 
of  the  Auto  Radiator  Repair  Co, 

(a)     Show  in  journal  form  the  entry  made  by  the  bookkeeper  for  the  Coch- 
ran Mfg.  Co.  to  record  the  draft  and  interest. 

(2)  Prepare  a  sixty-day  interest-bearing  note  in  favor  of  A.  Strange  &  Co., 
payable  at  the  Jackson  National  Bank,  for  the  balance  due  January  i,  including 
interest  on  all  purchases  from  the  due  date  up  to  and  including  January  i,  and 
allowing  interest  on  all  payments  from  date  up  to  and  including  January  i. 

(a)     Show  in  journal  form  the  entry  made  by  the  bookkeeper  for  the  Coch- 
ran Mfg.  Co.  to  record  the  note  and  interest. 

(3)  July  I  R-  H.  Donnelley  of  the  R.  H.  Donnelley  Company  wishes  to 
transfer  the  note  shown  below  their  ledger  account,  and  give  the  company's  check 
in  settlement  for  the  account.  He  is  to  pay  interest  on  each  past-due  item  and  to 
be  allowed  interest  on  each  payment  from  date  up  to  and  including  July  i,  also 
to  be  allowed  credit  for  the  accrued  interest  in  the  note. 

(a)  Write  the  check  for  Mr.  Donnelley  to  sign. 

(b)  Show  the  calculations  necessary  to  ascertain  the  amount  of  the  check. 

(c)  Show  in  journal  form  the  entry  necessary  to  close  the  account  and  to 
record  the  value  of  the  note  and  interest. 

Exercise  No.  55,  Journal  Entries,  Notes  and  Drafts. 

Journalize  the  following  transactions  using  the  numbers  as  the  days  of  the 
current  month,  and  present  the  work  to  the  teacher  for  approval. 

1.  Gave  Simpson  Bros,  our  sixty-day  note,  dated  today,  for  $250.00,  to  apply 
on  account. 

2.  John  Howard  gave  us  his  thirty-day  note,  dated  today,  for  $128.36,  in 
full  of  account. 

3.  Sold  James  Morgan,  on  his  note  for  thirty  days,  200  bu.  oats  at  49  cents. 

4.  Received  $150.00  from  A.  C.  Williams,  in  payment  of  his  note  due  today. 

5.  Accepted  Martin  Bros.'  ten-day  draft  for  $329.86,  in  part  payment  of 
account. 

6.  Received  $286.48  from  M.  J.  Thompson,  on  his  note,  due  today. 

7.  Bought  from  the  Hall  Safe  &  Lock  Co.,  for  $200.00,  one  fireproof  safe,  and 
gave  in  payment  check  for  $50.00,  and  our  note  due  in  sixty  days,  for  $150.00. 

8.  Drew  a  ten-day  draft  on  A.  C.  Weaver  for  $150.00,  the  balance  he  owes 
us,  and  sent  the  draft  to  Arnold  Bros.,  to  apply  on  account  we  owe  them.  Mr. 
Weaver  has  accepted  the  draft. 

Transactions  of  this  nature  are  not  fair  to  the  creditor,  but  when  they  occur,  the  one  who 
draws  the  draft  (drawer)  debits  the  account  with  the  creditor  to  whom  the  draft  is  given  (payee), 
and  credits  the  account  with  the  customer  on  whom  it  is  drawn  (drawee),  if  the  draft  is  accepted  or 
paid.  The  drawee  debits  the  account  with  the  drawer,  and  credits  the  Notes  Payable  account  if  he 
accepts  the  (time)  draft  or  the  Cash  account  if  he  pays  the  (sight)  draft.  The  payee  debits  the  Notes 
Receivable  account  if  the  (time)  draft  is  accepted  or  the  Cash  account  if  the  (sight)  draft  is  paid, 
and  credits  the  account  with  the  drawer. 

9.  Bought  from  Payne  &  Hart,  merchandise  per  invoice  of  this  date,  $869.48. 
Gave  in  payment  our  ninety-day  note,  dated  today. 

10.  James  Milligan  gave  us  his  note  for  $125.00,  due  in  thirty  days  from 
today  to  apply  on  account. 


RADIO  SET 


137 


11.  Received  from  R.  M.  Upman,  a  ten-day  draft  on  Hall  Bros.,  for  $150,00, 
to  apply  on  an  account  Upman  owes  us.    Hall  Bros,  have  accepted  the  draft. 

12.  Purchased  from  Remington  Typewriter  Co.,  one  No.  11  Remington 
typewriter,  for  $100.00.  Gave  in  payment  our  check  for  $25.00,  and  three  notes 
for  $25.00  each,  due  in  thirty,  sixty  and  ninety  days. 

This  transaction  requires  an  entry  with  one  debit  and  four  credits — one  for  the  cash  paid  and 
one  for  each  note. 

13.  Drew  a  ten-day  draft  on  Yeager  Bros,  for  $354.81,  the  amount  they  owe 
us,  and  sent  it  to  Dawson  &  Perry  to  apply  on  account.    (See  instructions  in  No.  8.) 

14.  J.  J.  Darling  gave  us  his  note  for  $175.00  due  in  sixty  days  from  today; 
and  his  check  for  $86.14,  in  full  of  account  he  owes  us. 

15.  Bought  from  the  Consolidated  Milling  Company,  merchandise  per  in- 
voice of  this  date,  $689.28.  Gave  in  payment  a  note  which  we  hold  (Notes  Receiv- 
able) for  $127.65,  our  note  due  in  thirty  days  for  $400.00,  and  our  check  for  the 
balance. 

16.  Borrowed  $400.00  from  the  bank  on  our  thirty-day  interest-bearing  note 
for  this  amount. 

17.  Accepted  Marblehead  &  Co.'s  draft  at  ten  days  for  $681.29,  in  full  of 
account. 

18.  Paid  Donaldson  Bros.  $250.00  in  payment  of  a  note  which  is  due  today. 

19.  Our  note  for  $500.00  is  due  at  the  bank  today.  Gave  them  a  check  for 
$250.00,  and  a  new  note  with  interest  for  $250.00  in  settlement  of  this. 

20.  Accepted  Martin  Bros.'  ten-day  draft  for  $150.00,  to  apply  on  account. 

21.  Paid  our  note  for  $200.00  due  today. 

22.  Our  note  for  $800.00,  in  favor  of  Stillman  Bros.,  is  due  today.  We  have 
settled  the  same  by  giving  them  our  check  for  $300.00,  and  two  interest-bearing 
notes  for  $250.00  each,  due  in  thirty  and  sixty  days,  respectively. 

23.  Robert  Davis  owes  us  a  note  for  $627.65,  which  is  due  today.  He  settles 
the  same  by  giving  us  his  note  for  $300.00,  a  note  that  has  been  transferred  to  him 
for  $127.65  which  we  owe,  and  his  check  for  the  difference. 

24.  A.  L.  Day  owes  us  $582.65.  He  settles  the  account  as  follows:  his  thirty- 
day  note  for  $250.00,  our  note  for  $210.00  (Notes  Payable)  which  he  holds,  and 
his  check  for  $122.65. 

25.  We  owe  Anderson  Bros.  $427.55.  They  accept  our  check  for  $127.55, 
and  three  notes  of  equal  amount  dated  today,  due  in  thirty,  sixty  and  ninety  days, 
in  full  of  account. 


RADIO  SET 

This  is  a  practice  set  without  vouchers,  and  consists  of  the  transactions  for 
a  period  of  two  months  performed  by  Robert  A.  McFarland  who  is  engaged  in  the 
radio  supply  business.  The  transactions  are  separate  from  the  text  and  are  included 
with  the  books  of  account  necessary  to  record  them.  The  purpose  of  this  set  is 
to  provide  a  review  of  the  principles  discussed  in  the  text  and  in  the  W,  H.  Good- 
win practice  set.  The  student  will  follow  the  teacher's  instructions  in  regard  to 
the    completion    of    this    set. 


138  QUESTIONS. 

QUESTIONS 

1.  Under  what  conditions  would  the  cost  of  a  desk  be  debited  to  the  Purchases 

account? 

2.  Under  what  conditions  would  the  cost  of  a  desk  be  debited  to  the  Furniture 

and  Fixtures  account? 

3.  W.  H.  Banks,  owner  of  Banks'  Drug  Store,  rented  a  typewriter  on  January  i 

for  one  year  at  a  rental  of  $3.00  per  month.  What  accounts  would  his 
bookkeeper  debit  and  credit  when  the  ^monthly  rent  was  paid? 

4.  January  i  of  the  next  year  Mr.  Banks  purchased  a  new  typewriter  for  $100.00 

cash,  and  on  December  31  of  the  same  year  he  sold  it  for  $75.00  cash,  (a) 
What  accounts  would  his  bookkeeper  debit  and  credit  when  the  typewriter 
was  purchased?  (b)  What  accounts  would  his  bookkeeper  debit  and  credit 
when  the  typewriter  was  sold  ? 

5.  How  much  did  Mr.  Banks  save  by  owning  his  own  typewriter? 

6.  If  he  had  not  sold  the  typewriter  December  31,  should  he  have  considered 

it  still  worth  $100.00? 

7.  If  he  wished  to  show  that  it  had  decreased  in  value,  could  you  suggest  a  means 

of  doing  this? 

8.  Why  should  the  credit  to  the  Furniture  and  Fixtures  account  show  cost  and 

not  selling  price? 

9.  If  a  desk  which  has  been  purchased  for  sale  is  transferred  from  stock  for  use 

in  the  office,  what  accounts  will  be  debited  and  credited? 

10.  Would  an  automobile  truck  used  for  delivering  merchandise  sold  be  regarded 

as  one  of  the  fixed  assets  of  the  business? 

11.  If  the  business  buys  a  safe  for  $400.00  and  pays  freight  $50.00,  will  the  cost 

of  the  safe  shown  in  the  Furniture  and  Fixtures  account  be  the  cost  of  the 
safe  at  the  factory  or  this  cost  plus  the  freight? 

12.  If  fixtures  belonging  to  the  business  are  destroyed  by  fire,  will  the  insurance 

be  adjusted  on  the  cost  value  of  the  same  or  the  present  value? 

13.  What  is  the  legal  rate  of  interest  in  your  home  state? 

14.  Does  the  law  of  your  state  permit  the  collection  of  a  rate  higher  than  the 

legal  rate? 

15.  Explain  the  difference  between  interest  and  discount. 

16.  In  what  respect  does  the  Interest  Cost  account  resemble  the  Expense  ac- 

count as  they  both  relate  to  the  operations  of  the  business? 

17.  When  is  interest  a  cost  to  the  business? 

18.  When  is  interest  an  income  to  the  business? 

19.  Why  does  the  law  limit  the  income  from  interest  when  it  does  not  limit  the 

income  from  the  operations  of  a  business? 

20.  If  a  customer  owes  the  business  $500.00  which  is  due,  and  gives  his  note  for 

this  amount,  due  in  ninety  days,  should  he  be  required  to  pay  interest? 
Why? 

21.  (a)     What  is  the  due  date  of  a  note  dated  May  9  and  payable  ninety  days 

after  date?  (b)  What  is  the  due  date  of  a  note  dated  May  9  and  payable 
three  months  after  date? 

22.  Why  is  the  interest  on  a  note  for  $169.27  for  sixty  days  at  6%,  $1.69? 

23.  Explain  the  difference  between  current  assets  and  fixed  assets  and  the  reason 

for  this  difference. 

24.  Explain  the  difference  between  the  profit  on  merchandise  sold  in  a  mercantile 

business,  and  the  profit  resulting  from  interest  earned. 

25.  What  is  the  first  thought  of  a  bookkeeper  when  a  business  form  representing 

a  transaction  is  given  to  him?  the  second  thought?  the  third?  the 
fourth? 


Part  Two — Partnership 

Chapter  XITI 

THE  PARTNERSHIP  CONTRACT  AND  ACCOUNTS  WITH  PARTNERS 

§  110.  Introduction.  The  purpose  of  the  discussion  in  this  division  is  to 
give  the  student  further  information  in  regard  to  the  principles  of  accounting  in 
connection  with  the  recording  of  transactions,  and  practice  through  the  exercises 
in  applying  these  principles.  Two  practice  sets,  separate  from  the  text,  accompany 
this  division.  While  the  title  of  the  division  is  "Partnership"  and  the  business  in 
each  of  the  practice  sets  is  conducted  by  partners,  yet  the  principles  discussed  and 
illustrated  may  be  applied  to  a  business  owned  and  operated  by  an  individual. 
This  chapter  contains  a  discussion  of  the  partnership  and  the  accounts  necessary 
to  record  the  transactions  with  the  partners. 

§  111.  Accounting  is  the  science  which  treats  of  the  proper  recording, 
classification,  presentation,  and  interpretation  of  the  financial  facts  relating  to  a 
business  enterprise.  Bookkeeping  is  that  part  of  accounting  which  relates  to  the 
recording  of  business  transactions.  It  is  difficult  to  determine  just  where  book- 
keeping ends  and  accounting  begins,  because  the  transactions  should  be  classified 
as  they  are  recorded  if  the  proper  analysis  is  to  be  made  from  the  reports  prepared 
at  the  close  of  the  fiscal  period. 

In  the  preceding  chapters  no  attempt  was  made  to  consider  the  classification 
of  transactions  and  the  analysis  of  reports.  Now  that  the  student  understands 
the  method  of  recording  transactions  and  preparing  reports,  he  can  better  appreciate 
the  reason  for  classification  and  analysis.  A  course  in  bookkeeping  without  a 
discussion  of  classification  and  analysis  would  not  be  fair  to  the  student  because 
he  would  be  handicapped  in  his  work  as  a  bookkeeper,  and  as  a  manager  of  his 
own  business  he  could  not  -interpret  the  information  which  would  come  to  him 
from  the  accounting  department. 

§  112.  A  Partnership  is  the  relation  existing  between  two  or  more  persons 
who  have  associated  their  time,  labor,  skill  and  capital  in  some  business  enterprise 
for  their  joint  profit.  The  partners  are  the  persons  who  have  entered  into  the 
agreement  to  form  a  partnership. 

§  113.  The  Purpose  of  Forming  a  Partnership  is  the  mutual  benefit  of 
all  interested.  The  qualifications  and  natural  ability  of  each  person  difi"er  widely. 
One  person  seldom  possesses  all  the  essential  requirements  for  an  ideal  business 
man;  for  this  reason,  the  association  of  two  or  more  partners  is  often  very  desirable. 
A  mercantile  business  owned  and  operated  by  a  shrewd  buyer,  a  good  salesman, 
and  an  efficient  collector  as  partners  will  be  sure  of  success  if  the  three  partners  are 
congenial.    While  the  necessary  capital  for  conducting  the  business  is  usually  the 

139 


140  CAPITAL  OF  A  PARTNERSHIP 

chief  incentive  to  the  formation  of  a  partnership,  yet  the  natural  ability  and  in- 
tegrity of  each  partner  should  always  be  considered,  especially  if  each  is  to  take 
an  active  part  in  the  management  of  the  business. 

James  Brown  operates  a  garage  for  storage.  Robert  Davis  is  salesman  for  a  local  automobile 
concern.  Frank  Jones  is  an  expert  auto  repair  mechanic.  These  three  men  form  a  partnership  for 
the  purpose  of  operating  a  garage,  selling  passenger  cars,  and  conducting  a  repair  shop.  If  the 
partners  work  together  and  there  is  no  discord,  the  business  should  be  a  success. 

§  114.  The  Capital  of  a  Partnership  consists  of  (a)  assets  invested  at  the 
beginning  of  business,  and  (b)  subsequent  investments.  The  net  assets  of  the 
partnership  are  the  total  assets  less  the  liabilities;  these  net  assets  do  not  belong 
to  any  one  partner  either  as  a  whole  or  in  part,  but  belong  to  all  of  them  in  com- 
mon. The  capital  of  a  partnership  is  the  same  as  the  capital  of  a  business  owned 
by  an  individual,  except  that  the  net  capital  of  the  individual  business  belongs 
to  the  owner,  while  the  net  capital  of  the  partnership  belongs  to  the  partners,  but 
neither  is  permitted  to  withdraw  his  share  without  the  consent  of  the  others. 

A.  L.  Day  owns  and  operates  a  groceiy  business.  He  decides  to  discontinue  the  business  and 
dispose  of  the  assets  at  auction.  After  paying  his  liabilities,  he  can  use  the  remainder  of  his  assets 
in  any  way  which  he  desires.  O.  L.  Garber  and  C.  N.  Simpson  operate  a  hardware  business  as 
partners.  Mr.  Garber  wishes  to  retire,  but  Mr.  Simpson  does  not  want  him  to  do  so.  If  Mr.  Garber 
insists  upon  retiring,  he  will  be  responsible  to  Mr.  Simpson  for  any  damage  caused  by  his  action. 
If  the  two  partners  cannot  agree  upon  some  plan  of  action,  it  will  be  necessary  to  ask  a  court  of 
equity  to  appoint  a  receiver  to  sell  the  assets,  pay  the  liabilities,  and,  after  the  liabilities  are  paid, 
divide  the  remainder  of  the  assets  between  the  partners. 

§  115.  The  Articles  of  Copartnership  is  the  contract  entered  into  between 
the  partners  at  the  beginning  of  the  business  and  must  conform  to  the  laws  of 
the  state  in  which  the  partnership  business  is  located.  The  agreement  between 
the  partners  should  be  in  writing  and  signed  by  each  partner.  It  should  contain 
the  following  information: 

(i)  The   date,   and    time   the   partnership   is   to   continue. 

(2)  The  name  of  each  partner  and  the  firm  name  under  which  the  business 
will  be  operated. 

(3)  The  amount  invested  by  each  partner. 

(4)  The  city  and  state  in  which  the  business  is  to  be  located. 

(5)  The  nature  of  the  business. 

(6)  The  duties  of  each  partner. 

(7)  The  compensation  each  partner  is  to  receive  for  his  services. 

(8)  The  division  of  the  profits. 

(9)  Any  special  conditions  that  may  be  agreed  upon  by  the  partners. 

Illustration  No.  69  shows  the  partnership  agreenient  between  C.  W.  Keeland 
and  A.  D.  Munson,  partners  in  a  retail  hay,  grain,  feed  and  coal  business. 

§  116.  The  Relation  Between  the  Partners  is  such  that  neither  partner 
should  take  action  in  important  cases  without  consulting  the  other  partners.  The 
individual  owner  of  a  business  may  operate  the  business  without  consulting  any 
one  as  he  alone  is  responsible  for  its  operations,  but  each  partner  in  a  partnership 
is  responsible  to  the  other  partners,  hence  should  consult  them  even  though,  ac- 
cording to  the  agreement,  it  might  not  be  necessary  for  him  to  do  so.  The  success 
of  a  partnership  can  be  assured  only  with  the  full  cooperation  of  all  the  members, 
and  this  cooperation  can  be  best  efifected  when  the  partners  are  in  accord  on  all 
business  transactions  of  any  importance. 

No  matter  how  well  qualified  the  partners  may  be,  unless  their  relations  are  agreeable  the 
business  cannot  be  a  success.  In  the  case  of  Garber  and  Simpson  in  the  illustration  under  §  114, 
it  is  possible  that  each  was  well  qualified  to  perform  the  duties  under  the  Articles  of  Copartnership, 
but  the  fact  that  one  of  them  wanted  to  sell  might  indicate  that  their  relations  were  not  satisfactory. 


ARTICLES  OF  COPARTNERSHIP  141 


ARTICLES  OF  COPARTNERSHIP 

^^ii    Contract,   -l/atZe  and  entered  into  on  the .Sep.QP.'l day  of 

.... .Ap.ri.l 19 by  and  between. . .9... .^V . _ Keelan d _ of _ _C inc imiat i ,_ _ Ohio ,  _ _ _ 

pax ty...of .  th.e  .f  ir  s t  :par t  ^ _  and  A .. .p... .Munson  o f _ .C inp_innati_,_ _ Ohi o ,  _ 

p.arti[_ of __the   second  part, 

WITNESSETH:     That  tlie  said  parties  have  this  day  formed  a  copartnership  for  the  purpose  of  engaging  in  and 

co«rf«c/;ni7..a..reJ_a_il_hay,_grai  ^ 

business  under  the  following  stipulatiotis  which  are  made  a  part  of  this  contract: 

FIRS T:    The  said  copartnership  is  to  continue  for  a  term  of yJ^VP. §.  .^^6%?.? 

from  date  hereof. 

SECOND:    The  business  shaU  be  conducted  under  tlie  tfirm  name  of. .  .Q  . .  .W... .  Ke  el  an  d  .&.  .Q  .0.  • 

THIRD:    The  inveHments  are  as follows:.Q.-..^.-.K§.^.l?J^§il..^^.5.§X?..^S_shgwi_'bj_the. 

Balance  Sheet  of  his  business,  prepared  March  31]  the  partnership. 

iissames  the  liabilities  shown  by  this  Balance  Sheet. 
A.  D.  LIunson,  cash,  Five  Thousand  Dollars  f|5,000.00). 


FOURTH:    All  profits  or  losses  arising  from  said  business  are  to  be  shared  as  follows: • 

C.  W...K.eeland,  one-half  j_  A.  D.  Munson,  one -half 

FIFTH:  A  systematic  record  of  all  transactions  is  to  be  kept  in  a  double  entry  set  of  books,  which  are  to  be  open 
for  the  inspection  of  each  partner.  On.the..l.a.S.t..da^..Of  .June  and  .pec_.___fte„aj<er  a  statement  of 
the  business  is  to  be  made,  the  books  closed  and  each  partner  credited  with  the  amount  of  the  gain.  A  statement  may  be 
made  at  such  other  time  as  the  partners  agree  upon. 

SIXTH:  Each  partner  is  to  devote  his  entire  time  and  attention  to  the  business  and  to  engage  in  no  other  busi7iess 
enterprise  without  the  written  consent  of  the  other. 

SEVENTH:  Each  partner  is  to  have  a  salary  of  S.  2.QP.»y.Qper  month,  the  same  to  be  tvitMravm  at  S7tch  time 
or  times  as  he  may  elect.  Neither  partner  is  to  willidraw  from  the  business  an  amount  in  excess  of  his  salary  ivithout 
the  written  consent  of  the  other. 

EIGHTH:    The  duties  of  each  partner  are  defined  cs  follows:.. Q.:  .W.t.i£e.el.an.d..is..tp..h&V.e. 

general   sugervision  of   the   business  and  act   as  pur  chasing.  _ag:.en.t  ..and... 
credit  man;_A.   D.  Munson  is  to  act  as  sales  manager._ 

NINTH:    Neither  partner  is  to  become  surety  or  bondsman  for  anyone  unihoutihe  written  consent  of  the  other. 
IN  WITNESS  WHEREOF,   The  parties  aforesaid  have  hereunto  set  their  hands  and  affixed  their  seals  on  the 
day  and  year  above  written. 


..^■_.,^..Z 


Illustration  No.  69,  Articles  of  Copartnership. 

EXPLANATION.  This  contract  is  the  partnership  agreement  between  C.  W.  Keeland  and 
A.  D.  Munson.  It  includes  all  the  conditions  mentioned  in  §  115  and  a  special  condition  in  which 
the  partners  agree  not  to  become  surety  for  another  during  the  term  of  the  contract. 


142  INCOME  TAX  FOR  A  PARTNERSHIP 

§  117.  Method  of  Forming  a  Partnership.  A  partnership  is  formed  by 
the  partners  signing  the  Articles  of  Copartnership.  Each  partner  is  expected  to 
invest  the  property  mentioned  in  the  agreement.  One  copy  of  the  agreement 
should  be  kept  on  file  in  the  office,  and  if  desired,  a  vsynopsis  of  it  may  be  made  in 
the  general  journal.  The  business  to  be  operated  by  the  partners  may  be  a  continua- 
tion of  a  business  which  has  been  in  operation  by  one  or  more  of  the  partners,  or 
it  may  be  a  new  business.  The  capital  of  the  partnership  at  the  beginning  consists 
of  the  property  invested  by  the  individual  partners,  less  any  liabilities  that  may 
be  assumed. 

§  118.  Admission  of  a  Partner.  A  partner  may  be  admitted  into  a  going 
concern  at  any  time,  but  it  must  be  upon  the  agreement  of  all  the  partners.  If  the 
amount  of  his  investment  is  not  dependent  on  the  present  worth  of  the  business, 
it  is  not  necessary  to  prepare  a  Balance  Sheet  and  a  Statement  of  Profit  and  Loss 
nor  to  close  the  ledger.  However,  it  is  better  to  ascertain  the  present  condition  of 
the  business  through  these  reports  because  the  new  partner  will  be  better  satisfied 
with  his  investment  if  he  has  full  information  in  regard  to  the  past  operations  of 
the  business  and  its  present  financial  condition.  The  admission  of  a  partner  cancels 
the  copartnership  agreement  of  the  former  partners  and  requires  the  preparation 
of  new  Articles  of  Copartnership  to  be  signed  by  all  the  members. 

§  119.  Retirement  of  a  Partner.  One  or  more  of  the  members  in  a  part- 
nership may  retire  at  any  time  upon  consent  of  all  the  partners.  One  partner 
might  retire  without  the  consent  of  all  the  others,  but  such  action  would  cause  him 
to  be  responsible  to  the  other  partners  for  any  loss  resulting  therefrom.  When  the 
value  of  the  retiring  partner's  interest  in  the  business  can  be  determined  without 
the  preparation  of  the  Balance  Sheet  and  Statement  of  Profit  and  Loss,  these  re- 
ports are  not  necessary  Since  the  retirement  of  a  partner  cancels  the  Articles  of 
Copartnership  and  requires  a  new  agreement,  it  is  customary  to  prepare  the  Balance 
Sheet  and  Statement  of  Profit  and  Loss  and  close  the  ledger  so  that  the  new  agree- 
ment may  begin  a  fiscal  period. 

§  120.  Income  Tax  for  a  Partnership.  The  income  of  each  business 
operated  as  a  partnership  is  subject  to  the  Federal  Income  Tax;  however,  the  tax 
is  not  paid  by  the  partnership  as  such,  but  by  the  partners  individually.  Quoting 
from  Section  218  of  the  Re\enue  Act  of  1921.  "Individuals  carrying  on  a  business 
in  partnership  shall  be  liable  for  income  tax  only  in  their  individual  capacity;"  and 
quoting  from  Section  224  of  the  same  act:  "Every  partnership  shall  make  a  return 
for  each  taxable  year,  stating  specifically  the  items  of  its  gross  income  and  the 
deductions  allowed  by  this  title,  and  shall  include  in  the  return  the  names  and 
addresses  of  the  individuals  who  would  be  entitled  to  share  in  the  net  income  if 
distributed  and  the  amount  of  the  distributive  share  of  each  individual  The  re- 
turn shall  be  sworn  to  by  any  one  of  the  partners."     See  Appendix  C. 

§  121.  Accounts  Peculiar  to  a  Partnership.  The  accounts  required  to 
show  the  results  of  the  operations  of  a  partnership  may  be  the  same  as  those  needed 
to  show  the  results  of  the  operations  of  a  similar  business  owned  by  an  individual 
except  that  a  separate  Capital  account  will  be  required  for  each  partner.  The  nature 
of  each  of  these  Capital  accounts  will  be  the  same  as  that  of  the  one  Capital  account 
for  a  business  owned  and  operated  by  a  sole  proprietor,  as  explained  in  §  34.  Trans- 
actions affecting  the  compensation  of  partners  as  per  the  Articles  of  Copartnership 
and  that  part  of  the  profit  to  be  withdrawn  should  be  recorded  in  an  account  sepa- 
rate from  the  one  showing  the  investment  and  withdrawals  from  the  investment. 
For  this  reason  it  is  customary  to  have  two  accounts  with  each  partner,  a  Capital 
account  and  a  Personal  or  Drawing  account. 

PARTNER'S  CAPITAL  ACCOUNT 
§  122.     The  Purpose  of  this  Account  is  to  show  the  investments  and  with- 
drawals of  the  partner,  also  his  share  of  the  net  loss  or  net  profit  resulting  from  the 


ACCOUNTS  WITH  PARTNERS 


143 


operations  of  the  business.    The  nature  of  the  account  is  the  same  as  that  of  the 
Capital  account  of  an  individual  as  explained  in  §  34. 

Credit  the  Partner's  Capital  Account: 


If  4. 

116. 


Debit  the  Partner's  Capital  Account: 

%  I.  For  debts  owed  by  him  at  the 
beginning  of  business  and  as- 
sumed by  the  partnership. 

^  2.  For  amounts  withdrawn  from 
the  capital  invested. 

T[  3.     For  his  share  of  the  net  loss. 

^  7.  The  Balance  of  the  Partner's  Capital  Account  during  the  fiscal  period 
shows  his  net  investment,  and,  at  the  end  of  the  fiscal  period  after  the  ledger  is 
closed,  his  proprietorship  in  the  partnership.  The  sum  of  the  proprietorship  of  all 
the  partners  is  the  proprietorship  or  net  capital  of  the  partnership.  The  net  invest- 
ment of  each  partner  is  shown  on  the  Balance  Sheet  (Illustration  No.  92)  in  the 
same  manner  as  the  investment  of  an  individual  as  explained  in  §  34. 


For  his  investment  at  the  begin- 
ning of  the  partnership. 

For  all  subsequent  investments. 

For  his  share  of  the  net  profit 
which  is  to  remain  in  the 
business. 


Credit  the  Partner's  Personal  Account: 

\  4.  For  his  salary  as  per  Articles  of 
Copartnership. 

^  5.  For  cash  paid  by  him  out  of 
funds  advanced  to  him  (H  3) 
or  paid  out  of  his  private  funds 
in  the  interests  of  the  business. 

*\\  6.  For  that  part  of  the  profit  which 
the  partners  have  agreed  may 
be  withdrawn. 


PARTNER'S  PERSONAL  ACCOUNT 

§  123.  The  Purpose  of  this  Account  is  to  show  a  record  of  those  trans- 
actions with  the  partner  which  do  not  affect  his  Capital  account.  These  include 
withdrawals  from  salary  or  that  part  of  the  profit  set  aside  for  withdrawal;  also 
special  transactions,  such  as  temporary  loans  to  the  partnership  on  open  account, 
cash  advanced  to  the  partner  for  traveling  expenses,  etc. 

Debit  the  Partner's  Personal  Account: 

H  I.  For  cash  paid  him  by  the  part- 
nership for  (a)  salary  as  per 
Articles  of  Copartnership  and 
(b)  profit  withdrawn. 

1[  2.  For  merchandise  which  he  takes 
out  of  stock  to  apply  on  (a) 
salary  or  (b)  profit  withdrawn. 

^  3.  For  cash  paid  to  him  to  be  used 
by  him  for  the  business. 

^  7.  The  Balance  of  a  Partner's  Personal  Account,  if  a  debit,  shows  the 
amount  he  owes  the  partnership  for  overdraft  on  account  of  salary  or  profits  to  be 
withdrawn;  if  a  credit,  the  amount  due  him  by  the  partnership  on  account  of 
salary  or  profits  to  be  withdrawn. 

As  a  rule,  the  Personal  account  of  each  partner  will  be  in  balance  at  the  close  of  the  fiscal 
period.  If,  for  any  reason,  a  Personal  account  remains  open,  the  balance,  if  a  debit,  is  shown  on 
the  Balance  Sheet  as  a  deduction  from  the  balance  of  his  Capital  account;  if  a  credit,  as  an  addition 
to  the  balance  of  his  Capita!  account. 

§  124.  Opening  Entries  for  a  Partnership.  When  a  partnership  has  been 
formed  by  the  partners  signing  the  Articles  of  Copartnership,  the  cash  or  other 
assets  invested  by  each  partner  become  the  property  of  the  partnership,  and  should 
be  recorded  as  such  in  the  books  of  account;  each  asset  invested  is  recorded  on  the 
debit  side  of  an  account  and  each  partner's  investment  is  recorded  on  the  credit 
side  of  his  Capital  account.  When  the  partnership  is  formed  to  continue  the  op- 
eration of  a  going  business  or  to  combine  one  or  more  going  businesses,  it  is  cus- 
tomary for  the  partnership  to  assume  the  liabilities  of  the  business  or  businesses 
to  be  operated  by  it.  This  means  that  the  sole  proprietor  or  partners  who  own 
the  going  business  will  be  credited  for  the  value  of  the  assets  belonging  to  the  busi- 
ness and  debited  for  the  liabilities  which  the  partnership  assumes. 


144 


OPENING  ENTRIES  FOR  A  PARTNERSHIP 


October  l  James  Brown  and  Robert  Duncan  form  a  partnership  for  the  purpose  of  operating 
a  retail  grocery  business  which  has  been  owned  and  operated  by  James  Brown  as  a  sole  proprietor. 
It     is    agreed     that     James 


^^c.^^£^'-U-e--if-  /  / 


f 


^^X^O-^-Z..^^  ^A;??-*^*-^*'*-?^    C-<:^^-«>Z^«-<> 


T'SJ.'^f 


>-a-^; 


/3  M^  fO 


Brown  is  to  have  credit  for 
the  value  of  his  assets  as 
shown  by  the  Balance  Sheet,  ^^ 
and  is  to  be  debited  with  the 
liabilities  shown  by  the  same 
report.  Robert  Duncan  is  to 
invest  $2,000.00  in  cash. 
The  value  of  the  assets  be- 
longing to  James  Brown  are 
as  follows:  cash,  $1,200.00; 
merchandise,  $1,356.50;  ac- 
counts receivable,  $935.60; 
notes  receivable  $300.00.  The 
liabilities  are  accounts  pay- 
able, $1,345.90,  and  notes 
payable,  $1,000.00.  The  cash 
invested  by  Brown  and  Dun- 
can would  be  entered  on  the 
receipts  side  of  the  cash  book  in  the  same  form  as  the  cash  investment  shown  by  the  first  entry  in 
the  cash  book  for  the  Model  Set  (Chapter  VI).  The  other  assets  invested  by  James  Brown  and  his 
liabilities  assumed  would  be  recorded  in  the  general  journal  as  in  the  illustration  above.  If  desired, 
this  entry  might  be  preceded  by  a  synopsis  of  the  partnership  agreement  as  explained  in  §  1 17, 

§  125.  Entries  for  the  Admission  or  Withdrawal  of  a  Partner.  When 
a  partner  is  admitted,  the  entry  for  the  assets  invested  by  him  is  the  same  as  the 
entry  for  the  investment  of  a  partner  at  the  beginning  of  a  business.  Thus,  if  the 
new  partner  invests  cash,  the  entry  will  be  made  on  the  receipts  side  of  the  cash 
book;  if  he  invests  merchandise,  notes,  personal  accounts,  or  other  assets,  the 
entry  will  be  made  in  the  general  journal.  If  the  partnership  assumes  debts  owed 
by  the  new  partner,  his  Capital  account  will  be  debited  with  these  in  the  same 
manner  as  if  the  liabilities  were  assumed  at  the  beginning  of  a  business. 

When  a  partner  withdraws  from  the  business,  it  is  necessary  to  close  his  Capital 
account  by  debiting  it  and  crediting  Cash  or  the  account  which  shows  the  asset 
accepted  by  the  retiring  partner  in  settlement  for  his  interest  in  the  business. 
If  the  partnership  does  not  pay  the  retiring  partner  the  full  amount  agreed  upon, 
the  balance  due  him  is  a  liability.  If  this  balance  owed  the  retiring  partner  is 
evidenced  by  a  written  agreement,  it  will  be  recorded  in  the  Notes  Payable  ac- 
count; if  by  a  verbal  agreement,  it  will  be  recorded  as  an  account  payable.  If 
the  amount  which  the  retiring  partner  accepts  for  his  interest  in  the  business  does 
not  balance  his  Capital  account,  this  account  should  be  closed  into  a  special  account, 
the  balance  of  which  will  represent  the  profit  or  loss  to  the  partnership  because 
of  the  withdrawal. 


Exercise  No.  56,  Articles  of  Copartnership  and  Opening  Entry. 

W.  L.  Westbrook  owns  and  operates  a  garage  for  the  purpose  of  storing  cars. 
He  wishes  to  add  a  repair  department  and  to  act  as  selling  agent  for  passenger 
cars.  In  order  that  he  may  secure  the  needed  capital  and  assistance  in  the  operations 
of  the  business,  he  forms  a  partnership,  on  January  i,  with  W.  W.  Woodward,  an 
experienced  salesman,  and  C.  H.  Armstrong,  an  expert  mechanic.  The  partner- 
ship is  to  continue  for  three  years,  and  the  business  is  to  be  operated  under  the 
name  of  the  Central  Garage. 

W.  L.  Westbrook  invests  the  building  in  which  the  garage  is  operated,  valued 
at  $4,500.00;  the  lot  on  which  the  building  is  located,  $1,500,00;  accounts  re- 
ceivable due  from  those  who  have  space  rented  in  the  garage,  $753-50 1  and  cash, 
$500.00.  He  owes  the  Citizen's  Bank  and  Trust  Company  a  note  for  $2,500.00, 
which  the  partnership  assumes. 


PARTNERSHIP  EXERCISES  145 

W.  VV.  Woodward  invests"  a  demonstration  car  which  he  owns,  valued  at 
$1,500.00;  two  new  cars  which  he  has  purchased  for  sale,  valued  at  $1,750.00 
each;  a  note  for  $530.50,  signed  by  A.  W.  Miller;  and  cash,  $1,223.00.  He  owes 
the  First  National  Bank  a  note  for  $2,000.00  which  the  partnership  assumes. 

C.  H.  Armstrong  invests  machinery  and  tools,  valued  at  $2,500.00,  which  he 
has  been  using  in  a  shop  operated  by  himself;  and  cash,  $1,000.00.  He  owes  L. 
I.  Milford  an  account  of  $500.00  which  the  partnership  assumes. 

Mr.  Westbrook  will  have  charge  of  the  office  and  the  general  operations  of  the 
business;  Mr.  Woodward  will  devote  his  time  to  the  sales  of  automobiles;  and 
Mr.  Armstrong  will  have  charge  of  the  repair  department.  Each  partner  is  to 
receive  a  salary  of  $200.00  per  month.  The  profits  are  to  be  divided  as  follows: 
Mr.  Westbrook  and  Mr.  Woodward,  each  three-eighths;  Mr.  Armstrong,  one- 
fourth.  No  partner  is  to  become  surety  for  any  one  during  the  time  of  the  part- 
nership, nor  engage  in  any  other  business. 

Prepare  (i)  the  Articles  of  Copartnership  and  (2)  the  opening  entries  in  the 
journal  (including  a  synopsis  of  the  agreement)  and  cash  book,  for  the  assets 
and  liabilities  invested  by  each  partner.  The  value  of  the  building  is  to  be  recorded 
in  a  Building  account,  and  that  of  the  lot,  in  a  Land  account;  the  student  will 
select  titles  for  the  accounts  to  record  the  other  assets  and  the  liabilities  (§  4). 

Exercise  No.  57,  Admission  of  a  Partner,  and  Transfer  of  Net  Profit 
to  Partners'  Capital  Accounts. 

First  Division.  July  i  Robert  MacFarland,  one  of  the  salesmen  employed  by  the 
Central  Garage  (Exercise  No.  56),  wishes  to  purchase  an  interest  in  the  business  and 
the  three  partners  agree  to  sell  him  a  one-fourth  interest  for  $3,000.00  payable 
$1,000.00  cash;  one  Liberty  bond,  accepted  at  par  value,  $1,000.00;  and  his  note,  due 
in  six  months,  for  $1,000.00.  The  assets  invested  by  him  become  the  partnership 
property.  It  is  agreed  that  each  partner  will  share  equally  in  the  profits  of  the 
partnership  from  July  i,  but  that  the  books  will  not  be  closed  until  the  end  of  the 
business  year.  All  the  partners  agree  to  the  other  conditions  in  the  original  Articles 
of  Copartnership. 

Prepare  (i)  the  entry  for  the  assets  invested  by  Robert  MacFarland,  and  (2) 
show  the  changes  that  will  be  necessary  in  preparing  new  Articles  of  Copartnership. 

Second  Division.  December  31  the  Statement  of  Profit  and  Loss  prepared  by 
the  bookkeeper  for  the  Central  Garage  shows  the  net  profit  for  the  year  to  be 
$2,495.75.  Make  the  general  journal  entry  to  credit  each  partner's  Capital  ac- 
count for  his  share  of  the  profit,  taking  into  consideration  the  agreement  made 
with  Robert  MacFarland  July  i.  The  student  may  assume  that  this  net  profit 
stands  as  a  credit  to  the  Profit  and  Loss  account,  and  that  one  half  of  the  profit 
is  applicable  to  the  first  half  of  the  year  and  the  remainder  to  the  latter  half. 

Exercise  No.  58,  Opening  Entry,  and  Transfer  of  Net  Profit 
to  Partners'  Capital  and  Personal  Accounts. 

First  Division.  H .  W.  Meyer  owns  and  operates  a  gasoline  station  at  32  75  Grand- 
view  Avenue.  James  C.  Dexter  owns  and  operates  a  gasoline  station  at  716  Cooper 
Street  of  the  same  city.  A.  L.  Burwell  is  a  salesman  for  the  Moore  Oil  and 
Refining  Co.  These  three  men  agree  to  form  a  partnership  for  the  purpose  of 
continuing  the  operations  of  the  two  gasoline  stations  and  establishing  a  new 
station  at  4721  Poplar  Street.  The  partnership  is  to  continue  for  a  period  of 
two  years  from  October  i.  The  business  is  to  be  conducted  under  the  name  of 
"The  Merchants  Oil  and  Gas  Co."    The  investment  of  each  partner  is  as  follows: 


146  QUESTIONS  ON  PARTNERSHIP 

H.  W.  Meyer  invests  gasoline  in  stock,  $2i6.-5o;  oil  in  stock,  $175.95;  equip- 
ment, $1,600.00;  notes  receivable,  $200.00;  accounts  receivable,  $309.50;  cash, 
$1,000.00;  building,  $2,500.00;  lot,  $1,500.00.  He  owes  notes  payable,  $1,500.00; 
accounts  payable,  $375.50. 

James  C.  Dexter  invests  gasoline  in  stock,  $1,459.20;  oil  in  stock,  $1,298.65; 
cash,  $835.50;  rent  paid  in  advance,  $200.00;  accounts  receivable,  $1,630.25;  and 
notes  receivable,  $984.40.     He  owes  a  note  payable,  $562.50. 

A.  L.  Burwell  invests  gasoline,  $450.60;  oil,  $322.20;  and  cash  $5,000,00. 
He  owes  an  account  payable,  $250.00. 

Mr.  Meyer  is  to  have  charge  of  one  oil  station  and  supervise  the  buying;  Mr, 
Dexter  is  to  have  charge  of  the  other  t)il  station  and  keep  the  books  of  account; 
Mr,  Burwell  is  to  have  charge  of  the  new  oil  station  and  supervise  the  selling. 
Each  partner  is  to  receive  a  salary  of  $250.00  per  month;  profits  are  to  be  divided 
equally.     Each  partner  agrees  not  to  engage  in  any  other  line  of  business. 

The  student  is  required  to  make  the  opening  entry  in  the  general  journal, 
showing  a  synopsis  of  the  Articles  of  Copartnership, 

Second  Division.  September  30  of  the  following  year,  the  Statement  of  Profit 
and  Loss  shows  a  profit  of  $6,387.68.  It  is  agreed  that  each  partner's  Capital  account 
shall  be  credited  with  $1,500.00  of  this  profit  and  each  partner's  Personal  account 
credited  with  the  remainder  of  his  share  of  the  profit.  The  amount  credited  to 
the  Personal  accounts  may  be  withdrawn  within  ninety  days,  but  not  more  than 
one-third  is  to  be  withdrawn  within  any  one  month. 

The  student  is  required  to  show  in  journal  form  the  entry  necessary  to  transfer 
the  net  profit  from  the  Profit  and  Loss  account  to  the  Partners'  Capital  and  Per- 
sonal accounts;  also  the  entry  October  31,  when  each  partner  withdraws  one- 
third  of  the  profit  credited  to  his  Personal  account. 

QUESTIONS 

1.  Explain  the  distinction  between  bookkeeping  and  accounting. 

2.  Would  you  consider  it  advisable  to  enter  into  a  partnership  agreement  with 

an  individual  who  had  an  undesirable  reputation?     Why? 

3.  Name  three  local  business  concerns  which  are  conducted  as  partnerships. 

4.  Name  the  essential  elements  of  the  Articles  of  Copartnership  and  state  the 

reasons  why  the  partnership  agreement  should  be  in  writing. 

5.  If  one  partner  should  sell  the  entire  stock  of  goods  for  cash  without  the 

consent  of  the  other  partners,  and  deposit  the  cash  in  the  bank  in  the  name 
of  the  partnership,  could  the  other  partners  rescind  the  sale? 

6.  If  a  partner  whose  capital  account  shows  a  balance  of  $9,600.00,  sells  his 

interest  in  the  partnership  to  the  other  partners  for  $9,000.00  cash,  what 
entry  is  required  to  record  the  transaction  on  the  books  of  the  partner- 
ship? 

7.  Why  does  the  Federal  Government  require  each  partnership  and  each  partner 

to  submit  a  separate  income  tax  return? 

8.  (a)  Why  is  an  account  debited  with  each  asset  invested  by  a  partner?     (b) 

Why  is  the  partner's  Capital  account  credited? 

9.  Why  is  it  advisable  to  keep  two  accounts  with  each  partner? 

ID.  If  a  note  invested  by  one  of  the  partners  proves  worthless,  what  account 
should  be  debited?  If  the  partner  had  guaranteed  payment,  would  this 
change  the  account  debited? 


Chapter  XIV 

ACCOUNTS  WITH  FIXED  ASSETS 

The  Purpose  of  this  Chapter  is  to  explain  the  accounts  necessary  to  record 
the  value  of  the  various  fixed  assets  usually  needed  in  connection  with  the  opera- 
tions of  a  mercantile  business,  and  also  to  show  the  method  of  recording  the  depreci- 
ation on  each  group.  It  is  necessary  to  have  a  separate  account  with  each  group  of 
fixed  assets  because  the  loss  resulting  from  the  use  of  these  assets  affects  different 
operating  costs. 

§  126.  Fixed  Assets  consist  of  property  purchased  for  use  in  the  business 
which  will  not  be  entirely  consumed  by  its  use  (§  99).  This  property  may  be  the 
building  in  which  the  business  is  operated,  fixtures  in  connection  therewith,  auto- 
mobile trucks  or  horses  and  wagons  for  delivering  goods,  store  fixtures,  etc.  The 
nature  and  use  of  a  fixed  asset  will  determine  the  account  in  which  its  value 
should  be  recorded.  The  accounts  necessary  to  record  the  fixed  assets  usually 
owned  by  a  mercantile  business  are  Office  Equipment,  Store  Fixtures,  Delivery 
Equipment,   Buildings,  and  Land. 

It  is  necessary  to  keep  two  accounts  with  each  group  of  fixed  assets,  one  to 
show  the  cost  of  the  assets  and  the  other  to  show  the  decrease  in  value  on  account 
of  use,  and  lapse  of  time.  The  debit  side  of  a  fixed  asset  account  should  show  cost 
and  the  credit  side  cost  so  that  the  balance  will  show  cost  (§  99).  If  any  other 
value  than  cost  is  recorded  on  the  credit  side  of  a  fixed  asset  account,  the  balance 
will  mean  nothing  to  the  management  when  adjusting  fire  losses  or  determining 
the  amount  of  decrease  in  the  value  of  the  property.  The  necessity  for  keeping 
two  accounts  with  each  group  of  assets  requires  an  explanation  of  depreciation. 

§  127.  Depreciation  refers  to  the  decrease  in  the  value  of  fixed  assets  through 
their  use  in  connection  with  the  operation  of  the  business  and  the  lapse  of  time. 
A  typewriter  purchased  for  $100.00  on  January  i  and  used  throughout  the  year 
will  not  be  worth  $100.00  at  the  end  of  the  year.  An  automobile  truck  purchased 
for  $2,000.00  on  January  i  and  used  throughout  the  year  for  delivering  merchandise 
will  not  be  worth  $2,000.00  at  the  end  of  the  year.  A  building  purchased  for 
$5,000.00  on  January  i  and  used  as  a  home  for  the  business  throughout  the  year 
will  not  be  worth  $5,000.00  at  the  close  of  the  year. 

The  decrease  in  the  value  of  fixed  assets  depends  largely  on  the  nature  of  the 
asset.  A  safe  will  not  depreciate  so  rapidly  as  a  typewriter;  an  automobile  truck 
will  depreciate  more  rapidly  than  scales  or  fixtures  used  in  the  storeroom;  a  frame 
building  will  depreciate  more  rapidly  than  a  brick  or  concrete  biiilding.  The 
purpose  of  the  discussion  here  is  not  to  consider  the  various  methods  of  arriving 
at  the  depreciation  of  fixed  assets  but  to  show  the  student  the  reason  for  deprecia- 
tion so  that  he  may  see  the  necessity  for  taking  care  of  it  through  a  record  in  the 
proper  accounts. 

The  amount  of  the  yearly  decrease  in  the  value  of  fixed  assets  due  to  depre- 
ciation is  usually  based  on  a  percentage  of  the  cost  of  the  fixed  asset.  If  it  is 
estimated  that  a  fixed  asset  can  be  used  for  a  period  of  ten  years,  the  amount  of  the 
depreciation  each  year  would  be  ten  per  cent  of  the  cost.  If  it  is  estimated  that 
the  fixed  asset  can  be  used  for  twenty  years,  the  depreciation  each  year  would  be 
five  per  cent  of  the  cost.  This  percentage  is  calculated  on  the  cost  price  and  not 
on  the  present  value ;  this  is  one  reason  for  showing  cost  value  in  the  account  with 
each   group   of  fixed   assets. 

147 


148  ACCOUNTS  WITH  FIXED  ASSETS 

In  all  cases  the  amount  of  depreciation  recorded  will  be  based  on  estimate 
only.  There  is  no  means  of  knowing  the  exact  amount  of  the  depreciation.  How- 
ever, the  policy  should  be  to  depreciate  the  fixed  assets  so  that  the  difference  be- 
tween the  account  which  shows  the  cost  value  of  the  asset  and  the  account  which 
shows  the  estimated  depreciation  will  show  the  approximate  present  value  of  the 
property.  If  furniture  and  fixtures  which  cost  $4,000.00  are  destroyed  by  fire,  the 
adjustment  will  be  made  on  the  present  value  of  these  fixtures.  If  the  account 
with  Furniture  and  Fixtures  shows  the  cost  value  $4,000.00  and  the  account  with 
depreciation  shows  the  estimated  decrease  $1,000.00,  the  insurance  adjuster  will 
have  a  basis  (present  value  $3,000.00)  on  which  to  adjust  the  fire  loss. 

The  reserve  for  depreciation  of  a- group  of  fixed  assets  is  usually  recorded  in 
an  account  with  the  same  title  as  that  which  shows  the  cost  value  of  the  asset,  pre- 
ceded by  "Reserve  for  Depreciation  of."  "Reserve  for  Depreciation  of  Ofifice  Equip- 
ment" used  as  the  title  of  an  account  indicates  that  the  account  shows  the  depreci- 
ation on  equipment  purchased   for  use   in   the  office. 

Depreciation  is  an  operating  cost  and  the  amount  is  recorded  on  the  debit  side  of  an  expense 
account  at  the  same  time  it  is  recorded  on  the  credit  side  of  the  Reserve  for  Depreciation  account. 
The  nature  and  use  of  the  fixed  asset  \\411  determine  the  expense  accounts  affected;  this  is  explained 
further  in  Chapter  XVI. 

OFFICE  EQUIPMENT  ACCOUNT 

§  128.  The  Purpose  of  this  Account  is  to  show  the  cost  of  the  property 
purchased  for  use  in  the  office,  which  includes  desks,  chairs,  typewriters,  safes, 
files,  bookcases,  tables,  etc. 

Debit  the  Office  Equipment  Account:  Credit  the  Office  Equipment  Account: 

1[  I.     For  the  invested  value  of  office  *\  2.     For  the  cost  value  of  office  equip- 

equipment    on    hand    at    the  ment  sold,  exchanged,  stolen, 

beginning  of  the  business,  and  destroyed,  or  discarded, 
for    the   cost   value   of   office 
equipment  purchased. 

^  3.  The  Balance  of  the  Office  Equipment  Account  shows  the  cost  value  of 
the  office  equipment  owned  by  the  business.  It  is  shown  as  a  fixed  asset  on  the 
Balance  Sheet  (Illustration  No.  92). 

RESERVE  FOR  DEPRECIATION  OF  OFFICE  EQUIPMENT  ACCOUNT 

§  129.  The  Purpose  of  this  Account  is  to  show  the  estimated  amount  of 
depreciation  on  office  equipment.  This  depreciation  is  usually  five  or  ten  per  cent 
of  the  cost  of  office  equipment,  depending  on  the  nature  of  the  equipment:  it  is 
quite  evident  that  a  typewriter  will  depreciate  more  rapidly  than  a  safe  or  a  desk. 

Debit  the  Reserve  for  Depreciation  Credit  the' Reserve  for  Depreciation 

of  Office  Equipment  Account:  of  Office  Equipment  Account: 

*\  I.     For  the  cost  value  of  office  equip-  ^  3.     At  the  close  of  each  fiscal  period, 

ment  discarded  or  destroyed.*  for  the  estimated  amount  of 

^  2.     For  the  depreciation  applicable  depreciation  on  account  of  the 

to    office    equipment    sold    or  use  of  office  equipment  during 

exchanged.  the  period. 

1[  4.  The  Balance  of  the  Reserve  for  Depreciation  of  Office  Equipment  Account 
shows  the  reserve  set  aside  for  the  depreciation  of  office  equipment,  the  cost  value 
of  which  is  debited  to  the  Office  Equipment  account.     The  cost  value  of  office 

*It  is  assumed  that  the  reserve  for  depreciation  on  the  equipment  discarded  or  destroyed  ap- 
proximately equals  its  cost  value;  if  this  is  not  the  case,  the  debit  to  the  reserve  account  will  be 
for  the  depreciation  only,  the  balance  being  debited  to  a  non-operating  expense  account  with  an 
appropriate  title. 


ACCOUNTS  WITH  FIXED  ASSETS  149 

equipment  (balance  of  the  Office  Equipment  account)  is  shown  as  a  fixed  asset  on 
the  Balance  Sheet  and  the  depreciation  (balance  of  the  Reserve  for  Depreciation 
of  Office  Equipment  account)  is  shown  as  a  deduction  from  this  amount  (111.  No. 
92). 

The  reserve  account  should  always  show  a  credit  balance.  If  at  any  time  the  debits  are  approx- 
imately the  same  as  the  credits,  it  is  evidence  that  an  error  is  being  made  by  setting  up  a  reserve 
too  small  or  by  debiting  this  account  with  more  than  the  depreciated  value  of  ofifice  equipment 
discarded,  stolen,  or  destroyed.  When  errors  of  this  kind  occur,  they  are  corrected  by  an  entry 
in  the  general  journal  to  record  the  additional  depreciation  or  to  adjust  the  amounts  debited  to 
the  account.  The  entry  to  record  the  additional  depreciation  affects  the  same  accounts  as  the  entry 
required  to  record  the  depreciation  at  the  end  of  the  fiscal  period;  the  entry  to  adjust  the  debits 
transfers  the  amount  adjusted  to  an  expense  account  or  to  a  special  loss  account. 

^  5.  Entry  to  Record  Depreciation  of  Office  Equipment.  At  the  close  of  each 
fiscal  period  an  entry  is  made  in  the  general  journal  to  record  the  estimated  depre- 
ciation of  office  equipment.  The  Administrative  Expense  account  is  debited  and 
the  Reserve  for  Depreciation  of  Office  Equipment  account  credited.  If  the  cost 
of  office  equipment  owned  by  the  business,  as  shown  by  the  balance  of  the  Office 
Equipment  account,  is  $500.00,  and  the  estimated  depreciation  is  five  per  cent, 
the  entry  in  journal  form  will  appear  as  in  the  illustration  below. 


The  use  of  the  ofifice  equipment  will  determine  the  expense  account  to  be  debited  for  the  depre- 
ciation. Unless  there  are  a  number  of  departments  in  the  ofifice,  the  depreciation  may  be  regarded 
as  an  administrative  cost  (Chapter  XVI). 

STORE  FIXTURES  ACCOUNT 

§  130.  The  Purpose  of  this  Account  is  to  show  the  cost  of  property  pur- 
chased for  use  in  the  storeroom,  which  includes  shelving,  show  cases,  scales,  trucks, 
etc.  The  nature  of  this  account  is  the  same  as  that  of  the  Office  Equipment  account 
and  the  various  debits  and  credits  are  similar.  If  desired,  the  cost  of  office  equip- 
ment and  store  fixtures  may  be  recorded  in  one  account  under  the  caption  "Office 
Furniture  and  Store  Fixtures"' or  "Furniture  and  Fixtures"  (§  100). 

Debit  the  Store  Fixtures  Account:  Credit  the  Store  Fixtures  Account: 
\  I.     For  the  invested  value  of  store  ^  2.     For  the  cost  value  of  store  fix- 
fixtures  on  hand  at  the  begin-  tures  sold.,  exchanged,  stolen, 
ning  of  the  business,  and  for  destroyed,  or  discarded, 
the  cost  value  of  store  fixtures 
purchased. 

1[  3.  The  Balance  of  the  Store  Fixtures  Account  shows  the  cost  value  of  the 
store  fixtures  owned  by  the  business.  It  is  shown  as  a  fixed  asset  on  the  Balance 
Sheet  (Illustration  No.  92). 

RESERVE  FOR  DEPRECIATION  OF  STORE  FIXTURES  ACCOUNT 

§  131.  The  Purpose  of  this  Account  is  to  show  the  net  amount  of  the 
reserve  set  aside  to  take  care  of  the  estimated  depreciation  of  store  fixtures.  This 
depreciation  is  usually  from  three  to  ten  per  cent  of  the  cost  of  the  fixtures,  depend- 


150 


ACCOUNTS  WITH  FIXED  ASSETS 


ing  on  the  nature  of  the  property.  The  debits  and  credits  are  the  same  as  those 
given  in  §  129  except  that  they  apply  to  store  fixtures.  The  balance  of  the  Reserve 
for  Depreciation  of  Store  Fixtures  account  shows  the  net  amount  of  the  reserve 
set  aside  for  the  depreciation  of  the  store  fixtures.  The  cost  value  of  store  fixtures 
(balance  of  the  Store  Fixtures  account)  is  shown  as  a  fixed  asset  on  the  Balance 
Sheet  and  the  depreciation  (balance  of  the  Reserve  for  Depreciation  of  Store 
Fixtures  account)  is  shown  as  a  deduction  from  this  amount  (111.  No.  92). 

^  I.  Entry  to  Record  Depreciation  of  Store  Fixtures.  At  the  close  of  each 
fiscal  period  an  entry  is  made  in  the  general  journal  to  record  the  estimated  depre- 
ciation of  store  fixtures.  The  Selling  Expense  account  is  debited  and  the  Reserve 
for  Depreciation  of  Store  Fixtures  account  credited.  If  the  cost  of  store  fixtures 
owned  by  the  business,  as  shown  by  balance  of  the  Store  Fixtures  account,  is 
$600.00,  and  the  estimated  depreciation  is  four  per  cent,  the  entry  in  journal  form 
will  appear  as  in  the  illustration  below. 


>-/yr| 


The  use  of  store  fixtures  will  determine  the  operating  account  affected  by  the  depreciation. 
Unless  there  are  a  number  of  departments  in  which  the  store  fixtures  are  used,  their  decrease  in  value 
on  account  of  depreciation  may  be  regarded  as  a  selling  cost  (Chapter  XVI). 

DELIVERY  EQUIPMENT  ACCOUNT 

§  132.  The  Purpose  of  this  Account  is  to  show  the  cost  of  property  pur- 
chased for  use  in  delivering  merchandise  sold,  which  includes  teams,  wagons, 
harness,  automobiles,  or  any  other  conveyances  used  by  the  business  in  delivering 
merchandise  to  customers.  The  nature  of  the  account  is  the  same  as  that  of  the 
OfBce  Equipment  account,  and  the  various  debits  and  credits  are  similar. 


Debit  the  Delivery  Equipment  Account: 
\  I.  For  the  invested  value  of  deliv- 
ery equipment  on  hand  at  the 
beginning  of  the  business,  and 
for  the  cost  value  of  delivery 
equipment  purchased. 


Credit  the  Delivery  Equipment  Account: 

%  2.     For  the  cost  value  of  delivery 

equipment    sold,     exchanged, 

stolen,  destroyed,  or  discarded. 


%  3.  The  Balance  of  the  Delivery  Equipment  Account  shows  the  cost  value 
of  the  delivery  equipment  owned  by  the  business.  It  is  shown  as  a  fixed  asset  on 
the  Balance  Sheet  (Illustration  No.  92). 


RESERVE  FOR  DEPRECIATION  OF  DELIVERY  EQUIPMENT  ACCOUNT 

§  133.  The  Purpose  of  this  Account  is  to  show  the  net  amount  of  the 
reserve  set  aside  to  take  care  of  the  depreciation  of  delivery  equipment.  This 
depreciation  is  usually  from  ten  to  twenty  per  cent  of  the  cost  of  delivery  equip- 
ment, depending  on  the  nature  of  the  equipment.  The  debits  and  credits  are  the 
same  as  those  given  in  §  129  except  that  they  apply  to  delivery  equipment.  The 
balance  of  the  Reserve  for  Depreciation  of  Delivery  Equipment  account  shows  the 


ACCOUNTS  WITH  FIXED  ASSETS 


151 


net  amount  of  the  reserve  set  aside  for  the  depreciation  of  delivery  equipment. 
The  cost  value  of  delivery  equipment  (balance  of  the  Delivery  Equipment  account) 
is  shown  as  a  fixed  asset  on  the  Balance  Sheet  and  the  depreciation  (balance  of  the 
Reserve  for  Depreciation  of  Delivery  Equipment  account)  is  shown  as  a  deduction 
from  this  amount  (Illustration  No.  92). 

^  I.  Entry  to  Record  Depreciation  of  Delivery  Equipment.  At  the  close  of 
each  fiscal  period  an  entry  is  made  in  the  general  journal  to  record  the  estimated 
depreciation  of  delivery  equipment.  The  Selling  Expense  account  is  debited 
and  the  Reserve  for  Depreciation  of  Delivery  Equipment  account  credited.  If 
the  cost  of  the  delivery  equipment  owned  by  the  business,  as  shown  by  the  balance 
of  the  Delivery  Equipment  account,  is  $1,850.00  and  the  estimated  depreciation 
is  ten  per  cent,  the  entry  in  the  journal  form  will  appear  as  in  the  illustration  below. 


c'/lZ^k--<:^£'<>^?^u-i^-e^y~' 


3/,  /^?- 


If  the  cost  of  delivering  merchandise  sold  to  customers  is  recorded  in  a  special  account  with 
Delivery  Expense  (Chapter  XVI),  this  account  would  be  debited  for  the  depreciation. 

LAND  ACCOUNT 

§  134.  The  Purpose  of  this  Account  is  to  show  the  cost  of  land  owned  by 
the  business,  on  which  is  located  the  buildings  in  which  the  business  is  conducted 
or  on  which  buildings  are  to  be  constructed.  When  real  estate  is  purchased,  a 
separate  value  should  be  placed  on  the  land  and  the  buildings. 

Credit  the  Land  Account: 
\  2.     For  the  cost  of  any  part  or  all  of 


Hi. 


Debit  the  Land  Account: 
For   the  invested   value  of   the 

land   owned   by   the   business  the  land  sold, 

at  the  beginning  of  the  busi- 
ness, and  for  the  cost  of  land 
purchased  during  the  oper- 
ations of  the  business. 

\  3.  The  Balance  of  the  Land  Account  shows  the  cost  value  of  the  land  owned 
by  the  business,  on  which  the  home  of  the  business  is  located  or  on  which  buildings 
X^ill  be  constructed  for  use  in  connection  with  the  operations  of  the  business.  It 
is  shown  on  the  Balance  Sheet  as  one  of  the  fixed  assets  of  the  business  (111.  No.  92). 

The  cost  of  land  purchased  by  the  business  includes  the  purchase  price  of  the  land  plus  the 
cost  of  securing  the  title.  Improvements  of  a  permanent  nature,  such  as  sidewalks,  grading,  streets, 
etc.,  should  be  regarded  as  part  of  the  cost  of  the  land  and  debited  to  the  Land  account.  Taxes  and 
expenses  in  connection  with  the  upkeep  of  the  land  are  not  a  part  of  its  cost,  and  should  be  recorded 
in  an  account  which  shows  operating  expense.  If  an  account  is  kept  with  Building  Expense,  the 
taxes  and  cost  of  the  upkeep  of  the  land  may  be  debited  to  this  account.  No  depreciation  account 
is  necessary  in  connection  with  land  because  land  does  not  depreciate  on  account  of  use. 


BUILDINGS  ACCOUNT 

§  135.     The  Purpose  of  this  Account  is  to  show  the  cost  of  the  buildings 
owned  by  the  business  as  a  home.     In  the  larger  cities  buildings  are  sometimes 


152 


ACCOUNTS  WITH  FIXED  ASSETS 


owned  as  a  home  for  the  business  without  the  business  holding  title  to  the  land, 
but  as  a  rule,  the  buildings  and  land  are  both  owned  by  the  business. 


Credit  the  Buildings  Account: 
^  2.     For  the  cost  price  of  buildings 
sold,  razed,  or  destroyed. 


Debit  the  Buildings  Account: 
^  I.  For  the  invested  value  of  build- 
ings owned  at  the  beginning 
of  the  business,  for  the  cost 
of  buildings  erected  on  land 
owned  by  the  business,  and 
for  permanent  improvements 
which  add  to  the  value  of  the 
buildings. 

^  3.  The  Balance  of  the  Buildings  Account  shows  the  cost  value  of  the  build- 
ing or  buildings  used  as  a  home  for  the  business.  It  is  shown  on  the  Balance 
Sheet  as  one  of  the  fixed  assets  (Illustration  No.  92). 

The  cost  of  maintaining  the  building  is  one  of  the  operating  costs  of  the  business  and  should 
be  recorded  in  an  account  which  shows  operating  cost.  The  cost  of  maintaining  the  buildings  in- 
cludes repairs  and  the  other  expense  incident  to  keeping  the  building  in  first-class  condition.  Repairs 
of  such  a  nature  that  they  increase  the  value  of  the  building  should  be  regarded  as  a  part  of  the  cost 
of  the  building  and  debited  to  the  Buildings  account.  The  replacing  of  a  shingle  roof  with  the  same 
kind  of  material  would  be  one  of  the  expenses  incident  to  keeping  the  building  in  good  order;  the 
replacing  of  the  shingle  roof  with  a  slate  or  tile  roof  would  increase  the  value  of  the  building,  hence 
should  be  regarded  as  an  increase  in  the  amount  of  capital  invested  in  the  asset. 


RESERVE  FOR  DEPRECIATION  OF  BUILDINGS  ACCOUNT 

§  136.  The  Purpose  of  this  Account  is  to  show  the  net  amount  of  the 
reserve  set  aside  to  take  care  of  the  depreciation  of  buildings.  The  yearly  de- 
preciation is  usually  from  two  to  five  per  cent  of  the  cost  of  the  buildings,  depending 
on  the  nature  of  the  construction.  The  debits  and  credits  are  the  same  as  those 
given  in  §  129,  except  that  they  apply  to  buildings.  The  balance  of  the  Reserve 
for  Depreciation  of  Buildings  account  shows  the  net  amount  of  the  reserve  set 
aside  for  the  depreciation  of  buildings.  The  cost  value  of  buildings  (balance  of 
the  Buildings  account)  is  shown  as  a  fixed  asset  on  the  Balance  Sheet  and  the 
depreciation  (balance  of  the  Reserve  for  Depreciation  of  Buildings  account)  is 
shown  as  a  deduction  from  this  amount  (Illustration  No.  92). 

^  I.  Entry  to  Record  Depreciation  of  Buildings.  At  the  close  of  each  fiscal 
period  an  entry  is  made  in  the  general  journal  to  record  the  estimated  depreciation 
of  buildings.  The  Administrative  Expense  account  is  debited  and  the  Reserve 
for  Depreciation  of  Buildings  account  credited;  if  an  account  with  Building  Ex- 
pense (§  156)  is  maintained,  this  account  is  debited  instead  of  Administrative 
Expense.  If  the  cost  of  the  buildings  owned  by  the  business,  as  shown  by  the 
balance  of  the  Buildings  account,  is  $5,000.00,  and  the  estimated  depreciation  is 
one  per  cent,  the  entry  in  journal  form  will  appear  as  in  the  illustration  below. 


c='<_^^,-il.,e-<^C?'Z-€^-^<?^ 


U?/  /  ^'>^ 


^o 


The  use  of  the  building  will  determine  the  operating  expense  account  affected  by  the  depre- 
ciation. Unless  a  number  of  departments  are  maintained,  the  depreciation  may  be  regarded  as 
a  rent  cost,  hence  a  debit  to  Administrative  Expense. 


EXERCISES  IN  FIXED  ASSETS  '  153 

Exercise  No.  59,  Recording  Transactions  with  Fixed  Assets 
and  Depreciation. 

A  truck  was  purchased  January  i,  1919,  for  $2,000.00  cash.  At  the  close  of 
each  year,  fifteen  per  cent  was  allowed  for  the  depreciation  during  the  year.  What 
is  the  book  value  of  the  truck  December  31,  192 1?  Show  (a)  the  entry  in  journal 
form  required  to  record  the  purchase  of  the  truck,  (b)  the  entry  required  at  the 
close  of  each  year  to  record  the  estimated  depreciation,  and  (c)  the  posting  of 
these  entries  to  the  proper  accounts;  also  show  (d)  the  entry  in  journal  form 
required  to  record  the  purchase  of  a  new  truck  January  ib,  1922,  for  $3,000.00, 
cash  $1,900.00,  exchange  value  of  the  old  truck,  $1,100.00,  and  (e)  the  posting  of 
this  entry  to  the  ledger  accounts. 

Exercise  No.  60,  Recording  Transactions  with  Fixed  Assets, 
Depreciation  and  Fire  Loss. 

The  following  office  equipment  was  purchased  January  i,  1917:  safe,  $200.00, 
bookkeeper's  desk,  $75.00;  stool,  $5.00;  typewriter  desk,  $60.00;  typewriter, 
$100.00;  chair,  $9.50;  roller  top  desk,  $90.00;  chair,  $12.50;  filing  cabinet,  $65.00; 
adding  machine,  $350.00.  The  safe  was  purchased  from  the  Hall  Safe  and  Lock 
Co.,  terms  one-half  cash  and  one-half  sixty-day  note  without  interest.  The  add- 
ing machine  was  purchased  from  the  Dalton  Adding  Machine  Co.,  for  cash 
$250.00,  and  two  notes  for  $50.00  each,  due  in  six  and  twelve  months  without 
interest.     Cash  was  paid  for  the  desks,  chairs,  typewriter  and  filing  cabinet. 

At  the  close  of  each  year,  up  to  and  including  December  31,  192 1,  this  equip- 
ment was  depreciated  as  follows:  desk,  5%;  chairs,  10%;  typewriter,  123^%; 
adding  machine,  10%;    files,  5%;    safe  4%. 

All  equipment,  except  the  safe,  was  damaged  by  fire  Jan.  17,  1922.  The  insur- 
ance adjuster  settled  by  paying  fifty  per  cent  of  the  book  value  Jan.  i,  1922  and 
allowing  the  owner  to  retain  the  equipment.  Jan.  22  the  typewriter  was  exchanged 
for  a  new  one,  price  $100.00,  with  an  exchange  allowance  of  $25.00,  cash  being 
paid  for  the  difference.  The  adding  machine  was  exchanged  for  a  new  one>  price 
$350.00,  with  an  allowance  of  $100.00  and  cash  paid  for  the  difference.  The  desks, 
chairs,  and  files  were  sold  to  a  junk  dealer  for  $50.00.  New  desks,  chairs  and  files 
were  purchased  January  23  for  cash  at  the  same  price  as  the  old  ones. 

The  student  is  required  to  show  (a)  the  entry  in  journal  form  for  the  furniture 
when  it  was  purchased,  (b)  the  entry  in  journal  form  for  the  depreciation  at  the 
close  of  each  year,  and  (c)  the  posting  of  these  entries  to  the  proper  accounts; 
(d)  the  entry  in  journal  form  for  the  fire  adjustment,  and  (e)  the  posting  of  this 
entry  to  the  proper  accounts;  (f)  the  entry  in  journal  form  for  the  purchase  of 
the  new  typewriter  and  adding  machine,  (g)  the  entry  for  the  sale  of  the  desks, 
chairs,  and  files,  (h)  the  entry  for  the  purchase  of  the  new  desks,  chairs,  and  files,  and 
(i)  the  posting  of  these  entries  to  the  proper  accounts. 

When  equipment  is  sold  or  exchanged,  the  actual  depreciation  only  should  be  debited  to  the 
Reserve  for  Depreciation  account.  The  difference  between  the  present  book  value  of  the  equipment 
(cost  less  depreciation)  and  its  exchange  or  selling  price  is  the  amount  of  the  loss  on  account  of  the 
fire  and  should  be  debited  to  an  account  with  "Fire  Loss."  The  amount  received  from  the  insurance 
adjuster  reduces  this  loss,  hence  should  be  credited  to  the  Fire  Loss  account.  When  these  entries 
have  been  made  and  posted,  the  Office  Equipment  account  will  show  the  cost  of  office  equipment 
owned  by  the  business,  the  Reserve  for  Depreciation  account  will  show  the  depreciation  on  the  safe, 
and  the  Fire  Loss  account  will  show  the  net  loss  on  account  of  the  fire.  (See  note  at  the  bottom  of 
page  148.) 

Exercise  No.  61,  Recording  Transactions  with  Fixed  Assets  and 
Depreciation,  Adjustment  of  Fire  Loss,  and  Report  to  the  Owner. 

The  facts  recorded  in  the  ledger  accounts  on  page  154  show  the  Office  Equip- 
ment and  Reserve  for  Depreciation  of  Office  Equipment  accounts  on  December  10, 
1922,  at  which  time  the  equipment  was  partially  destroyed  by  fire;  the  books  of 
account,  which  were  in  the  safe,  were  not  damaged.  On  December  15  the  insur- 
ance company  settled  by  paying  cash  for  sixty  per  cent  of  the  book  value  of  the 


154 


QUESTIONS  ON  FIXED  ASSETS 


equipment  at  the  time  of  the  fire  and  allowing  the  owner  to  retain  the  fixtures. 
December  i8,  the  owner  sold  the  equipment  to  a  junk  dealer  for  $50.00. 

The  student  is  required  to  show  (a)  the  entries  in  journal  form  for  the  equip- 
ment when  purchased,  assuming  that  cash  was  paid  for  all  equipment,  except 
typewriter  No.  2,  at  the  time  of  purchase;  the  entry  in  journal  form  for  the  depre- 
ciation, December  31,  1921;  (c)  the  entry  in  journal  form  for  the  exchange  of 
typewriter  No.  i  for  typewriter  No.  2,  assuming  that  the  exchange  value  of  the 
former  was  $90.00  and  that  cash  was  paid  for  the  difference;  (d)  the  entry  in 
journal  form  for  the  adjustment  of  the  insurance  company  assuming  that  5% 
depreciation  is  allowed  from  January  i,  1922,  to  the  date  of  the  fire;  (e)  the  entry 
in  journal  form  for  the  sale  of  the  equipment;  (f)  a  statement  to  the  owner  show- 
ing his  loss  on  office  equipment  on  account  of  the  fire. 

The  student  will  observe  that  the  equipment  is  described  in  the  explanation  column  of  the 
ledger  account.  When  typewriter  No.  i  is  exchanged,  the  new  typewriter  is  shown  as  No.  2  instead 
of  No.  I.  Equipment  should  always  be  numbered  when  purchased  and  the  number  attached  to  it 
by  tag  or  tack;  it  should  be  known  by  this  number  through  the  description  in  the  explanation  column 
of  the  account  or  in  a  special  inventory  book. 


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QUESTIONS 

Why  is  it  necessary  to  have  two  accounts  with  each  group  of  fixed  assets? 
What  amount  will  the  insurance  adjuster  use  as  a  basis  for  adjusting  a  fire 

loss  on  a  truck,  cost  $4,000.00,  reserve  for  depreciation  $1,500.00? 
Why  should  the  cost  value  of  delivery  equipment  be  recorded  in  an  account 

separate  from  that  in  which  the  cost  value  of  office  equipment  is  shown? 
Under  what  conditions  would  the  depreciation  on  buildings  be  regarded  as 

a  selling  expense? 
Why  is  it  necessary  to  show  the  cost  value  of  buildings  in  one  account  and 

the  cost  value  of  land  in  another? 
Under  what  conditions  would  the  depreciation  on  office  equipment  be  regarded 

as  a  buying  expense? 
Why  does   the   Federal   Government   limit   the   amount   of  depreciation? 
Would  the  percentage  of  depreciation  on  a  brick  building  be  greater  or  less 

than  that  on  a  frame  building?     Why? 
When  is  the  cost  of  repairs  on  a  building  debited  (a)  to  the  Building  account? 

(b)  to  Administrative  Expense?     (c)  to  Building  Expense? 
Under  what  conditions  might  a  Reserve  for  Depreciation   account  show  a 

debit  balance? 


Chapter  XV 

OPERATING  AND  NON-OPERATING  INCOME 

The  Purpose  of  this  Chapter  is  to  explain  the  accounts  needed  to  record  the 
principal  income  and  the  special  income  of  the  business  during  the  fiscal  period;  an 
income  to  a  business  is  the  profit  made  through  the  operations  of  the  business.  The 
owner  should  know  the  amount  of  the  principal  income  separate  from  special  in- 
come in  order  that  he  may  better  control  future  operations  of  his  business. 

§  137.  Every  Business  is  organized  for  the  specific  purpose  of  making  a 
profit.  This  profit  may  result  (a)  from  the  purchase  and  sale  of  merchandise,  (b) 
from  the  manufacture  and  sale  of  merchandise,  or  (c)  from  the  sale  of  services. 
The  profit  resulting  from  the  sale  of  merchandise  or  services  is  usually  referred  to 
as  the  operating  income  of  the  business.  Other  profits  which  result  from  the  oper- 
ation of  the  business  are  usually  referred  to  as  non-operating  income.  Non-operating 
income  includes  interest  earned,  discount  on  merchandise  purchased,  profit  on 
sales  of  real  estate,  and  other  profits  of  this  nature  which  may  or  may  not  occur 
during  each  fiscal  period. 

The  operating  income  of  a  mercantile  business  is  the  profit  resuhing  from  selling  merchandise; 
a  newspaper  publishing  business,  the  sale  of  advertising  and  subscriptions;  a  street  railway,  the 
sale  of  transportation;  a  telephone  company,  the  sale  of  telephone  service.  The  non-operating 
income  in  all  of  these  businesses  may  be  the  same;  that  is,  the  merchant,  the  publisher,  the  street 
railway,  and  the  telephone  company  may  each  earn  interest  on  notes,  make  a  profit  through  dis- 
counting its  bills,  or  sell  at  a  profit  real  estate  purchased  for  use  in  the  business.  The  owner  of  the 
business  will  base  the  future  operations  of  his  business  on  the  operating  income  because  this  will 
occur  in  each  fiscal  period,  while  non-operating  income  may  occur  only  occasionally. 

§  138.  Accounts  with  Merchandise.  The  operating  income  of  a  mercan- 
tile business  results  from  the  sale  of  merchandise  which  has  been  purchased  for 
sale.  As  explained  in  §§  17  and  18,  the  cost  of  merchandise  purchased  may  be 
recorded  in  one  account  with  Purchases,  and  the  sales  of  this  merchandise  in  one 
account  with  Sales.  When  this  plan  is  followed,  the  Purchases  account  is  debited 
with  the  invoice,  freight  and  drayage  cost,  and  credited  with  returns  and  allowances; 
the  Sales  account  is  credited  with  the  sales,  and  debited  with  returns  and  allow- 
ances. Where  the  operations  of  the  business  are  not  extensive,  the  information 
obtained  from  the  Purchases  and  Sales  accounts  will  be  all  that  the  owner  needs; 
but  where  the  amounts  involved  in  connection  with  freight  costs,  returns,  and 
allowances  are  large,  he  will  want  to  know  the  amount  of  each  item  separate  from 
the  invoice  cost  of  merchandise  and  the  returns  from  sales.  When  this  informa- 
tion is  needed,  the  invoice  cost  is  recorded  in  the  Purchases  account,  sales  in 
the  Sales  account,  the  freight  and  drayage  cost  in  a  separate  account,  and  returns 
and  allowances  both  on  account  of  purchases  and  sales  each  in  separate  accounts. 

The  discussion  of  accounts  with  Purchases,  Freight  In,  Purchases  Returns, 
Purchases  Allowances,  Inventory,  Sales,  Sales  Returns,  and  Sales  Allowances, 
which  follows,  relates  to  the  merchandise  accounts  necessary  to  give  the  manage- 
ment detailed  information  in  regard  to  the  cost  of  the  merchandise  sold  and  the 
returns  from  sales. 

If  desired,  one  account  may  be  kept  with  Merchandise  which  will  show  all  the  facts  relating 
to  its  purchase  and  sale.  Ho.wever,  if  this  is  done,  it  causes  returned  sales  to  be  recorded  as  if  they 
were  purchases  and  returned  purchases  to  be  recorded  as  if  they  were  sales,  which  is  incorrect.  It 
also  requires  the  cost  price  to  appear  on  the  debit  side  and  the  sale  price  on  the  credit  side  of  the 
same  account,  which  is  contrary  to  the  accounting  principle  that  equal  values  should  appear  on 
each  side  of  the  same  account,  as  in  Cash  and  in  Accounts  Receivable. 


156  OPERATING  INCOME  ACCOUNTS 

PURCHASES  ACCOUNT 

§  139.  The  Purpose  of  this  Account  is  to  show  the  net  invoice  cost  of 
merchandise  purchased.  When  the  account  is  kept  for  this  purpose,  returns,  allow- 
ances, and  freight  and  drayage  cost  are  recorded  in  separate  accounts.  The  owner 
of  the  business  needs  to  know  the  invoice  cost  of  the  merchandise  purchased  in 
order  to  compare  the  purchases  of  the  current  period  with  those  of  preceding 
periods,  and  for  use  as  a  guide  in  making  future  purchases. 

Debit  the  Purchases  Account:  Credit  the  Purchases  Account: 

1[  I.     For    the    invoice    cost    of    mer-  ^  2,     For   adjustments   which   reduce 

chandise  purchased.  .  the  invoice  cost  of  merchan- 

dise purchased   as  shown   by 
the  debit  side. 

^  3.  The  Balance  of  the  Purchases  Account  shows  the  net  invoice  cost  of 
merchandise  purchased  during  the  fiscal  period.  It  is  shown  on  the  Statement  of 
Profit  and  Loss  as  one  of  the  costs  of  the  merchandise  sold  (111.  No.  93). 

PURCHASES  RETURNS  ACCOUNT 

§  140.  The  Purpose  of  this  Account  is  to  show  the  net  value  of  merchan- 
dise purchased  and  later  returned  to  the  concern  from  which  it  was  purchased. 
It  is  quite  evident  that  merchandise  purchased  would  not  be  returned  unless  it 
were  unsatisfactory;  if  the  amount  of  the  returns  is  unusually  large,  the  manage- 
ment will  know  that  it  is  advisable  to  place  orders  with  other  concerns  which  will 
deliver  the  grade  and  quality  of  goods  desired. 

Debit  the  Purchases  Returns  Account:  Credit  the  Purchases  Returns  Account: 

\  I.     For  any  adjustments  which  re-  Tf  2.     For    the    invoice    cost    of    mer- 

duce    the    amount    of    mer-  chandise  returned  to  the  seller 

chandise  returned  as  shown  by  by  the  business, 
the  credit  side. 

^  3.  The  Balance  of  the  Purchases  Returns  Account  shows  the  net  amount 
of  purchases  returned  to  the  seller.  It  is  shown  on  the  Statement  of  Profit  and 
Loss  as  a  deduction  from  the  net  invoice  cost  of  purchases  (balance  of  the  Pur- 
chases account)  to  ascertain  the  net  purchases  (Illustration  No.  93.) 

PURCHASES  ALLOWANCES  ACCOUNT 

§  141.  The  Purpose  of  this  Account  is  to  show  the  net  amount  of  allow- 
ances granted  to  the  business  on  account  of  merchandise  purchased  being  received 
in  damaged  condition  or  not  according  to  sample.  If  the  amount  is  unusually 
large,  it  is  quite  evident  that  it  will  not  be  good  policy  for  the  business  to  continue 
to  buy  merchandise  from  those  who  must  be  continually  making  allowances  be- 
cause the  merchandise  is  carelessly  packed  or  otherwise  not  according  to  specifi- 
cations. If  desired,  purchases  allowances  may  be  combined  with  purchases  returns 
and  recorded  in  an  account  with  Purchases  Returns  and  Allowances  because  they 
are  both  deductions  from  the  invoice  cost. 

Debit  the  Purchases  Allowances  Account:  Credit  the  Purchases  Allowances  Account: 

\  I.     For  any  adjustments  which  re-  ^  2,     For   the   amount  of  allowances 

duce    the    amount    of    allow-  granted  to  the  business  by  its 

ances  granted  to  the  business  creditors. 

as  shown  by  the  credit  side. 

^  3.  The  Balance  of  the  Purchases  Allowances  Account  shows  the  net  amount 
of  allowances  granted  to  the  business  by  the  seller  on  account  of  merchandise 


OPERATING  INCOME  ACCOUNTS  157 

purchased  being  unsatisfactory.  It  is  shown  on  the  Statement  of  Profit  and  Loss 
as  a  deduction  from  the  net  invoice  cost  of  purchases  (balance  of  the  Purchases 
account)    to  ascertain   the  net  purchases  (Illustration   No.   93). 


FREIGHT  IN  ACCOUNT 

§  142.  The  Purpose  of  this  Account  is  to  show  the  freight,  drayage,  ex- 
press, and  postage  cost  of  merchandise  purchased.  The  word  "in"  is  used  in  con- 
nection with  the  title  of  this  account  to  distinguish  the  account  from  that  which 
shows  the  record  of  freight  and  drayage  on  merchandise  sold,  usually  designated  as 
"Freight  Out."  Freight  and  drayage  on  merchandise  purchased  are  part  of  the 
purchase  cost  of  the  merchandise,  while  freight  and  drayage  on  merchandise  sold 
are  part  of  the  selling  cost;  hence  the  necessity  for  recording  the  two  classes  of 
freight  and  drayage   in  separate  accounts. 

Debit  the  Freight  In  Account:  Credit  the  Freight  In  Account: 

Tf  I.  For  transportation  (freight,  ex-  \  2.  For  any  adjustments  which  re- 
press, and  postage)  cost  and  duce  the  transportation  and 
drayage  cost  on  merchandise  drayage  cost  as  shown  by  the 
purchased.  debit  side. 

^  3.  The  Balance  of  the  Freight  In  Account  shows  the  transportation  and 
drayage  cost  of  merchandise  purchased;  the  drayage  cost  may  be  shown  in  a 
separate  account  if  desired.  The  balance  of  this  account  is  shown  on  the  State- 
ment of  Profit  and  Loss  as  a  part  of  the  cost  of  the  merchandise  purchased.  (Il- 
lustration  No.   93.) 


INVENTORY  ACCOUNT 

§  143.  The  Purpose  of  this  Account,  as  explained  in  §  55,  is  to  show  the 
value  of  the  merchandise  inventory  at  the  close  of  a  fiscal  period.  Cost  value  in- 
cludes the  invoice  and  transportation  cost;  it  is  customary  to  include  these  two 
costs  as  one  amount  in  making  the  extensions  on  the  inventory  sheet.  The  value 
of  this  merchandise  may  be  transferred  to  the  Purchases  account  at  the  beginning 
of  the  next  fiscal  period,  or  it  may  be  allowed  to  remain  in  the  Inventory  account 
throughout  the  period  and  closed  into  Purchases  at  the  close  of  that  period. 

Debit  the  Inventory  Account:  Credit  the  Inventory  Account: 

1[  I.     At  the  close  of  the  fiscal  period,  %  2.     At    the   beginning   of    the    next 

with    the   value   of   the   mer-  fiscal  period  or  at  its  close,  for 

chandise  in  stock  as  shown  by  the  value  of  the  merchandise 

the   inventory   made   at   that  in    stock    as    shown    by    the 

time.  debit  entry. 

^  3.  The  Balance  of  the  Inventory  Account.  The  value  of  the  merchandise 
in  stock  at  the  beginning  of  a  current  fiscal  period  will  be  shown  recorded  either 
in  the  Inventory  account  or  in  the  Purchases  account  depending  on  when  the 
entry  mentioned  in  ^  2  is  made;  this  value  is  shown  as  an  addition  to  the  cost 
of  purchases  on  the  Statement  of  Profit  and  Loss  (Illustration  No.  93).  The 
value  of  merchandise  on  hand  at  the  close  of  a  current  fiscal  period  will  appear  on 


158  OPERATING  INCOME  ACCOUNTS 

the  debit  side  of  the  Inventory  account;  it  is  shown  as  a  current  asset  on  the 
Balance  Sheet  (Illustration  No.  92)  and  as  a  deduction  from  the  net  cost  of  mer- 
chandise purchased  on  the  Statement  of  Profit  and  Loss  (Illustration  No.  93). 

If  desired,  the  value  of  merchandise  on  hand  at  the  close  of  the  fiscal  period  may  be  recorded 
in  an  Inventory  account  with  the  year  written  after  the  name  of  the  account,  in  which  case  the 
amount  would  remain  in  the  Inventory  account  until  the  close  of  the  next  fiscal  period  and  the 
inventory  at  the  close  of  the  next  fiscal  period  would  be  recorded  in  an  Inventory  account  under 
the  year.  This  may  be  illustrated  as  follows:  Davis  Bros,  began  business  January  i,  1920.  De- 
cember 31,  1920,  the  merchandise  inventory  was  $5,651.75;  this  was  recorded  in  an  account  with 
"Inventory  1920"  and  was  allowed  to  remain  in  this  throughout  the  year  1921.  December  31,  1921, 
the  inventory  was  $6,278.85.  This  was  recorded  in  an  account  with  "Inventory  1921."  After  the 
ledger  was  closed  December  31,  1921,  the  "Inventory  1920"  account  was  in  balance  and  the  value 
of  merchandise  in  stock  December  31,  1921  was  shown  throughout  the  year  1922  in  the  "Inventory 
1 921"  account. 

SALES  ACCOUNT 

§  144.  The  Purpose  of  this  Account  is  to  show  the  gross  returns  from  the 
sales  of  merchandise;  when  the  account  is  kept  for  this  purpose,  the  returns  and 
allowances  are  recorded  in  separate  accounts.  As  explained  in  §  18,  the  account 
may  show  the  net  returns  from  sales,  in  which  case  returns  and  allowances  are 
recorded  in  the  Sales  account  and  not  in  separate  accounts. 

Debit  the  Sales  Account:  Credit  the  Sales  Account: 

^  I.     For  the  amount  of  errors  which  ^  2.     For    the    selling    price    of    mer- 

reduce  the  returns  from  mer-  chandise  sold, 

chandise  sold  as  shown  by  the 
credit  side. 

^  3  The  Balance  of  the  Sales  Account  shows  the  gross  sales  during  the  fiscal 
period.  It  is  shown  on  the  Statement  of  Profit  and  Loss  as  "Gross  Sales"  under 
the  caption  "Returns  from  Sales"  (Illustration  No.  93). 

SALES  RETURNS  ACCOUNT 

§  145.  The  Purpose  of  this  Account  is  to  show  the  net  value  of  merchan- 
dise sold  and  later  returned  by  the  one  to  whom  it  was  sold.  If  the  amount  is  un- 
usually large,  the  management  will  know  that  the  merchandise  it  offers  for  sale  is 
not  giving  satisfaction  to  customers  and  can  take  proper  steps  to  remedy  this  con- 
dition. 

Debit  the  Sales  Returns  Account:  Credit  the  Sales  Returns  Account: 

^  I.     For    the    selling    price    of   mer-  ^  2,     For  any  adjustments  which  re- 

chandise  returned  to  the  busi-  duce  the  value  of  merchandise 

ness  by  customers.  returned  as  show^n  by  the  debit 

side. 

^  3.  The  Balance  of  the  Sales  Returns  Account  shows  the  net  amount  of  sales 
returned  by  customers.  It  is  shown  on  the  Statement  of  Profit  and  Loss  (Illus- 
tration No.  93)  as  a  deduction  from  the  gross  returns  from  sales  (balance  of  the 
Sales  Account). 

SALES  ALLOWANCES  ACCOUNT 

§  146.  The  Purpose  of  this  Account  is  to  show  the  net  amount  of  allow- 
ances granted  by  the  business  to  its  customers;  these  allowances  are  usually  granted 
because  the  merchandise  is  not  equal  to  the  sample,  or  was  received  by  the  customer 
in  bad  condition  because  of  imperfect  manufacture  or  carelessness  in  packing. 
Sales  allowances  should  be  recorded  separately  from  sales  returns  because  these 
allowances  are  a  loss,  while  merchandise  returned  is  placed  in  stock  for  resale. 


NON-OPERATING  INCOME  ACCOUNTS  159 

Debit    the    Sales    Allowances    Account:  Credit   the   Sales   Allowances   Account: 

^  I.     For   the   amount  of  allowances  If  2.     For  any  adjustments  which  re- 

granted  by  the  business  to  its  duce    the    amount    of    allow- 

customers.  ances  granted  to  customers  as 

shown  by  the  debit  side. 

\  3.  The  Balance  of  the  Sales  Allowances  Accotmt  shows  the  net  amount  of 
allowances  granted  to  customers  on  account  of  merchandise  sold  being  unsatis- 
factory. It  is  shown  on  the  Statement  of  Profit  and  Loss  (Illustration  No.  93)  as 
a  deduction  from  the  gross  returns  from  sales  (balance  of  the  Sales  account). 

§  147.  Merchandise  Discount  refers  to  the  discount  deducted  from  pur- 
chases and  sales  invoices  as  per  terms.  The  discount  deducted  on  purchases  invoices 
is  usually  referred  to  as  "purchases  discount"  or  "discount  on  purchases";  the 
discount  deducted  from  sales  invoices  is  usually  referred  to  as  "sales  discount"  or 
"discount  on  sales."  The  purpose  of  merchandise  discount  is  to  encourage  prompt 
payment.  It  is  quite  evident  that  the  buyer  will  make  an  effort  to  pay  for  mer- 
chandise within  the  terms  of  discount  because  by  so  doing  he  can  cancel  an  obli- 
gation with  an  asset  of  less  value  and  thus  make  a  profit. 

PURCHASES  DISCOUNT  ACCOUNT 

§  148.  The  Purpose  of  this  Account  is  to  show  the  net  amount  of  discount 
resulting  from  the  payment  of  purchases  invoices  subject  to  discount  within  the 
terms  of  the  discount  as  stated  in  the  invoices.  The  discount  is  the  difference 
between  the  amount  of  the  check  required  to  pay  the  purchases  invoice  and  the 
net  amount  of  the  purchases  invoice. 

Debit  the  Purchases  Discount  Account:  Credit  the  Purchases  Discount  Account: 

^  I.     For   adjustments   which    reduce  ^  2.     For   the   discount   deducted   on 

the  amount  of  the  purchases  purchases    when    paid    within 

discount    as    shown    by    the  the    terms    of    the     invoices 

credit    side    of    the    account.  either    in     full    or    in     part. 

1[  3.  The  Balance  of  the  Purchases  Discount  Account  shows  the  net  amount 
of  the  discount  deducted  for  prompt  payment  of  purchases  invoices  during  the 
time  for  which  the  record  is  kept.  If  the  management  regards  purchases  discount 
as  a  non-operating  income,  it  is  listed  with  the  other  income  on  the  Statement  of 
Profit  and  Loss  (Illustration  No.  93) ;  if  purchases  discount  is  regarded  as  a  deduc- 
tion from  the  cost  of  merchandise  purchased,  it  is  shown  on  the  Statement  of 
Profit  and  Loss  as  a  deduction  from  the  cost  of  purchases.  It  is  usually  deducted 
from  the  gross  purchases  in  the  preparation  of  the  income  tax  return  (Art.  1583, 
Treasury  Reg.  No.  62). 

NOTE — The  purpose  of  the  discussion  of  purchases  discount  as  given  here  is  to  show  the 
debits  and  credits  applicable  to  the  account;  these  are  the  same  whether  purchases  discount  is 
regarded  as  a  deduction  from  the  cost  of  merchandise  purchased  or  as  a  non-operating  income. 
Since  the  statistical  information  gained  from  the  facts  shown  by  the  Purchases  Discount  account 
is  the  same  no  matter  how  it  is  regarded,  and  since  the  net  profit  is  the  same,  it  is  not  deemed  ad- 
visable to  enter  into  a  discussion  as  to  whether  it  is  better  to  regard  it  as  a  deduction  from  purchases 
cost  or  as  a  non-operating  income.  It  \^  regarded  as  a  non-operating  income  in  the  exercises  in  this 
text  and  in  the  practice  sets,  and  as  a  deduction  from  gross  purchases  on  the  income  tax  return. 

INTEREST  EARNED  ACCOUNT 

§  149.  The  Purpose  of  this  Account,  as  explained  in  §  107,  is  to  show  the 
interest  income  to  the  business  through  the  use  of  its  money  by  others.  This  is 
regarded  as  a  non-operating  income  because  it  is  an  income  that  may  not  occur 
in  every  fiscal  period. 


i6o 


EXERCISES 


Debit    the    Interest    Earned    Account:  Credit    the    Interest    Earned    Account: 

^  I.     For  any  deductions  which  reduce  1[  2,     For    interest    income    from    ac- 

the   income   from   interest  as  counts  and  notes  receivable. 

shown  by  the  credit  side. 
^  3.     The  Balance  of  the  Interest  Earned  Account  shows  the  net  returns  from 
interest  to  the  business.     It  is  shown  on  the  Statement  of  Profit  and  Loss  as  one 
of  the  non-operating  incomes  (Illustration  No.  93). 

Exercise  No.  62,  Purchases  and  Purchases  Discount. 

The  student  is  required  to  show  (a)  the  entry  in  journal  form  when  the  pur- 
chase in  the  invoice  below  was  made;  (b)  the  entry  in  journal  form  when  the 
invoice  w^as  paid  by  the  check  below;  and  (c)  the  posting  of  these  entries  to  the 
Purchases  and  Purchases  Discount  accounts. 


Terms 


SOLD      TO 


2/30,    n/60 

CINCINNATI 

6/18  192 

•Accounts  to  be  settled  Monthly 


South-western  Publishing  Co. 
209  U.  Third  St., 

Cincinnati,  Ohio. 


M  Cimms  aitoued  on  tfiis  Bill  unless  marie  within  FiveDcufs  /^rreceipt(f  Goods. 
Pay  mrthin^  to^^^ents  unless  by  our  written  .-lutlionty. 


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Envelopes        per  M  19.75 


991 


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Purchases  Invoice  Subject  to  Discount. 


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No     91202 
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OF  CiNCIXXATI. 


Check  in  Payment  of  Purchases  Invoice  Less  Discount. 


EXERCISES 


i6i 


Exercise  No.  63,  Recording  Transactions  with  Purchases 
and  Purchases  Discount. 


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The  student  is  required  to  show  (a)  the  entries  in  journal  form  for  the  amounts 
recorded  in  the  above  ledger  account;  (b)  the  check  stub  tilled  out  when  the  check 
was  issued  in  payment  of  the  invoice  on  the  day  it  was  due;  (c)  the  entry  in  journal 
form  to  record  the  payment. 


Exercise  No.  64,  Recording  Transactions  with  Capital,  Purchases, 
Sales,  Returns,  Allowances,  and  Purchases  Discount. 

Record   in  journal   form   the   following   transactions   performed   by   Lewis  & 
Statler,  during  the  month  of  August: 

Aug.  I.  S.  A,  Lewis  and  C.  F.  Statler  formed  a  partnership,  each  investing 
$2,500.00  cash. 
Purchased  from  L.  J.  Kent  Mfg.  Co.,  Pittsfield,  merchandise  per  pur- 
chases invoice  dated  today,  terms  2%  10  days,  $2,000.00.  They  pre- 
paid the  freight  on  this  shipment,  $214.50,  which  was  added  to  the 
amount  of  the  purchase  on  the  invoice. 

3.     Cash  sales  to  date  per  cash  register,  $43.40. 

Sold  Holmes  &  Warder,  Richmond,  on  account,  merchandise  per  sales 
invoice  rendered,  $164.50. 

6.     Received  credit  from  the  L.  J.  Kent  Mfg.  Co.  for  $35.00,  value  of  mer- 
chandise returned. 

10.     Paid  the  L.  J.  Kent  Mfg.  Co.  $2,140.20  in  full  for  purchases  invoice 
received  on  the  ist,  less  discount  on  the  purchase  as  per  terms. 
Cash  sales  for  the  week  per  cash  register,  $175.11, 

12.  Sold  Holmes  «&  Warder,  Richmond,  on  account,  merchandise  per  sales 
invoice  rendered,  $290.20. 

15.  Purchased  from  the  L.  J.  Kent  Mfg.  Co.,  Pittsfield,  merchandise  per 
purchases  invoice  dated  August  13,  terms  2%  10  days,  $855.00.  They 
prepaid  the  freight  on  this  shipment,  $70.50,  which  was  added  to  the 
amount  of  the  purchase  on  the  invoice, 

17.     Cash  sales  for  the  week  per  cash  register,  $198.20, 

19.  Allowed   Holmes  &  Warder  credit  for  $16.50,   value  of  merchandise^ 

returned. 

20.  Purchased  merchandise  for  cash,  $2,000.00, 

22.     Received  credit  from  the  L.  J.  Kent  Mfg.  Co.  for  $13.80  because  part 
of  the  merchandise  delivered  on  the  15th  was  received  in  damaged 
condition, 
*  {Concluded  on  page  162.)    , 


i62  QUESTIONS 

{Exercise  No.  64 — Continued  from  page  161.) 

23.  Paid  the  L.  J.  Kent  Mfg.  Co.  for  purchases  invoice  received  on  the 

15th,  including  the  freight,  less  allowance  of  the  22d  and  discount 
on  the  purchase  as  per  terms. 

24.  Cash  sales  for  the  week  per  cash  register,  $341.19. 

26.     Sold  S.  T.  Hollowell,  City,  on  account,  merchandise  per  sales  invoice 
rendered,  $69.80. 

28.     Allowed  S.  T.  Hollowell  credit  for  $5.00  because  part  of  the  merchandise 
sold  him  on  the  26th  was  defective. 

31.     Cash  sales  for  the  week  per' cash  register,  $437.60. 

When  the  above  transactions  have  been  recorded  in  the  journal  as  instructed, 
open  the  necessary  accounts  on  a  sheet  of  ledger  paper,  allowing  five  lines  for  each 
account  except  Cash,  L.  J.  Kent  Mfg.  Co.,  and  Sales,  each  of  which  requires  ten 
lines;    post,  and  take  a  Trial  Balance. 

QUESTIONS 

Why  is  it  advisable  for  the  bookkeeper  to  show  operating  income  separate 
from  non-operating  income  on  the  Statement  of  Profit  and  Loss? 

Name  the  operating  income  and  one  or  more  non-operating  incomes  of  a 
business  engaged  in  the  manufacture  of  ice. 

Why  and  when  is  the  balance  of  the  Inventory  account  closed  into  the  Pur- 
chases account? 

(a)  What  does  the  balance  of  the  Sales  Allowances  account  indicate  to  the 
management?     (b)  the  balance  of  the  Sales  Returns  account? 

(a)  What  does  the  balance  of  the  Purchases  Allowances  account  indicate  to 
the  management?     (b)  the  balance  of  the  Purchases  Returns  account? 

(a)  What  does  the  balance  of  the  Freight  In  account  show?  (b)  What  does 
this  mean  to  the  management?  (c)  What  does  the  balance  of  the  Freight 
In  account  determine  with  regard  to  the  location  of  the  business?  (d) 
Give  an  example. 

7.  What  is  the  purpose  of  merchandise  discount? 

8.  What  does  the  failure  of  a  customer  to  pay  a  sales  invoice  subject  to  a  three 

per  cent  discount  within  the  terms  of  the  discount  indicate  to  the  owner 
of  the  business? 

9.  Why  is  the  discount  deducted  from  purchases  invoices  an  income  to  the  business? 

10.  (a)  How  will  the  amount  of  purchases  discount  be  shown  on  the  Statement 
of  Profit  and  Loss  if  the  management  prefers  to  regard  it  as  a  non-operating 
income?  (b)  How  will  it  be  shown  if  the  management  prefers  to  regard  it 
as  a  deduction  from  the  cost  of  merchandise  purchased?  (c)  What  effect 
will  each  of  these  methods  have  on  the  net  profit  of  the  business? 


Chapter  XVI 

OPERATING  AND  NON-OPERATING  EXPENSE 

The  Purpose  of  this  Chapter  is  to  explain  the  accounts  necessary  to  record 
the  expenses  which  are  anticipated  at  the  time  the  business  is  organized,  and  the 
accounts  which  are  needed  to  record  other  expenses  that  may  occur  in  the  oper- 
ations of  the  business.  The  owner  of  the  business  should  know  the  cost  of  oper- 
ating the  business  separate  from  special  costs  in  order  to  control  better  the  future 
operations  of   the   business. 

§  150.  Operating  Expense.  When  a  business  is  organized  the  owner  or 
owners  know  that  certain  expenses  will  be  incurred  through  its  operations;  these 
include  the  cost  of  rent,  salaries,  advertising,  insurance,  and  taxes.  Expenses  of 
this  nature  are  usually  referred  to  as  operating  expenses  because  they  are  necessary 
in  the  operations  of  the  business  and  will  occur  in  every  fiscal  period.  Operating 
expenses  may  be  classified  into  three  groups:  (a)  those  applicable  to  the  buying 
of  merchandise  or  service  which  the  business  sells;  (b)  thos'e  which  refer  to  the 
general  administration  of  the  business;  and  (c)  those  applicable  to  the  selling  of 
the  merchandise  or  service  which  the  business  sells. 

BUYING  EXPENSE  ACCOUNT 

§  151.  The  Purpose  of  this  Account  is  to  show  the  cost  of  purchasing 
merchandise.  This  includes  the  salaries  of  the  buyer  and  his  assistants,  traveling 
expenses  paid  by  the  buyer,  and  any  other  expenses  applicable  to  the  purchase 
of  merchandise.  If  an  account  is  not  kept  with  Buying  Expense,  the  cost  of 
buying  merchandise  is  debited  to  the  Administrative  Expense  account. 

Debit    the    Buying    Expense    Account:  Credit   the   Buying   Expense   Account: 

^  I.     For  all  expenses  incurred  in  con-  ][  2.     For  any  adjustments  which  re- 

nection  with  the  purchase  of  duce   the   cost   of  purchasing 

merchandise.  merchandise  as  shown  by  the 

debit  side. 

If  3.  The  Balance  of  the  Buying  Expense  Account  shows  the  net  cost  of  pur- 
chasing merchandise;  it  is  shown  on  the  Statement  of  Profit  and  Loss  as  one  of 
the  operating  costs  of  the  business. 

SELLING  EXPENSE  ACCOUNT 

§  152.  The  Purpose  of  this  Account  is  to  show  the  cost  of  selling  merchan- 
dise. This  includes  the  salaries  of  the  sales  manager  and  his  assistants,  sales  clerks, 
and  traveling  salesmen;  expenses  of  the  sales  manager,  his  assistants,  and  traveling 
salesmen  in  connection  with  making  sales;  advertising  cost,  insurance  on  merchan- 
dise and  store  fixtures,  depreciation  on  store  fixtures,  and  other  selling  costs  of 
similar  nature.  The  cost  of  delivering  merchandise  sold  is  a  selling  cost  and  is 
recorded  in  the  Selling  Expense  account  if  an  account  is  not  kept  with  Delivery 
Expense.  The  owner  needs  to  know  the  cost  of  selling  goods  because  this  cost 
should  be  a  reasonable  percentage  of  the  sales. 

163 


164  OPERATING  EXPENSE  ACCOUNTS 

Debit    the    Selling    Expense    Account:  Credit    the    Selling    Expense    Account: 

*\  I.     For  all  expenses  directly  incurred  ^  2.     For  any  adjustments  which  re- 

in  connection  with   the  sales  duce  the  cost  of  selling  mer- 

of  merchandise.  chandise    as    shown    by    the 

debit  side. 

^  3.  The  Balance  of  the  Selling  Expense  Account  shows  the  net  cost  of  selling 
merchandise;  it  is  shown  on  the  Statement  of  Profit  and  Loss  as  one  of  the  oper- 
ating costs  of  the  business  (Illustration  No.  93). 

DELIVERY  EXPENSE  ACCOUNT 

§  153.  The  Purpose  of  this  Account  is  to  show  the  cost  of  delivering 
merchandise  sold;  this  includes  the  wages  of  drivers  and  chauffeurs,  repairs  on 
wagons  or  automobiles  used  in  the  delivery  of  merchandise,  insurance  and  depre- 
ciation on  delivery  equipment,  and  any  other  costs  applicable  to  the  delivery  of 
merchandise  sold.  Merchandise  shipped  by  freight  must  be  delivered  to  the  rail- 
road or  steamship  company  and  the  cost  of  this  delivery  is  a  part  of  the  delivery 
expense  the  same  as  the  delivery  of  merchandise  direct  to  the  customer.  The  cost 
of  delivering  merchandise  sold  is  a  part  of  the  selling  expense  and  may  be  recorded 
in  the  Selling  Expense  account.  The  owner  needs  to  know  the  cost  of  delivering 
merchandise  sold  because  this  should  be  a  reasonable  percentage  of  the  sales; 
another  reason  is  that  he  may  determine  the  most  economical  method  of  making 
delivery. 

Debit    the   Delivery   Expense   Account:  Credit   the   Delivery   Expense  Account: 

Tl  I.     For  all  expenses  directly  incurred  ^2.     For  any  adjustments  which  re- 

in connection  with  the  delivery  duce    the    cost    of    delivering 

of  merchandise.  merchandise  as  shown  by  the 

debit  side. 

^  3.  The  Balance  of  the  Delivery  Expense  Account  shows  the  net  cost  of 
delivering  merchandise  sold;  it  is  shown  on  the  Statement  of  Profit  and  Loss  as 
one  of  the  operating  costs  of  the  business  (Illustration  No.  93). 


LOSS  ON  DOUBTFUL  ACCOUNTS  ACCOUNT 

§  154.  The  Purpose  of  this  Account  is  to  show  the  amount  which  it  is 
estimated  will  be  lost  on  account  of  uncollectible  accounts  receivable.  This  account 
is  opened  at  the  close  of  the  fiscal  period  when  the  estimated  amount  is  recorded, 
and  is  closed  into  the  Profit  and  Loss  account  when  the  ledger  is  closed.  It  remains 
in  balance  during  the  fiscal  period. 

Debit   the   Loss   on   Doubtful  Accounts  Credit  the  Loss  on  Doubtful  Accounts 

Account:  Account: 

^  I.     For    the    amount    of   estimated  ^  2.     For  the  amount  shown  on  the 

loss  on  accounts  receivable.  debit    side    at    the    time    the 

ledger  is  closed. 

][  3.  The  Balance  of  the  Loss  on  Doubtful  Accounts  Account  shows  the  loss 
resulting  from  the  reserve  for  doubtful  accounts  (§  162,  ^  4).  It  is  usually  shown 
on  the  Statement  of  Profit  and  Loss  as  one  of  the  selling  expenses,  because  credit  is 
extended  through  the  sales  department  and  this  loss  is  the  result  of  the  extension 
of  credit  (Illustration  No.  93). 


OPERATING  EXPENSE  ACCOUNTS  165 

ADMINISTRATIVE  EXPENSE  ACCOUNT 

§  155.  The  Purpose  of  this  Account  is  to  show  the  cost  of  administration 
to  the  business.  This  includes  the  salaries  of  the  manager  and  his  assistants, 
salaries  of  bookkeepers,  stenographers,  and  other  office  assistants,  rent,  heat, 
light,  postage  for  use  in  the  office,  insurance  and  depreciation  on  office  equipment, 
taxes,  repairs,  and  other  operating  expenses  which  are  not  applicable  to  the  cost  of 
buying,  selling,  or  delivery.  If  the  business  owns  its  own  home,  insurance,  depre- 
ciation, taxes,  and  repairs  on  buildings  are  also  shown  in  this  account  unless  a 
separate  account  is  kept  with  Building  Expense,  in  which  case  these  costs  are 
debited  to  the  Building  Expense  account  (§  156).  The  management  needs  to  know 
the  cost  of  administering  the  affairs  of  the  business  because  this  should  be  a  reason- 
able percentage  of  the  sales. 

Debit  the  Administrative  Expense  Acct.:  Credit  the  Administrative  Expense  Acct.: 

^  I.     For  all  costs  applicable  to  the  *^  2.     For  any  adjustments  which  re- 

administration  of  the  business.  duce  the  cost  of  administering 

the  affairs  of  the   business   as 
shown  by  the  debit  side. 

*[[  3.  The  Balance  of  the  Admiiiistrative  Expense  Account  shows  the  net  cost 
of  administration  to  the  business;  it  is  shown  on  the  Statement  of  Profit  and  Loss 
as  one  of  the  operating  costs  of  the  business  (Illustration  No.  93). 


BUILDING  EXPENSE  ACCOUNT 

§  156.  The  Purpose  of  this  Account  is  to  show  the  cost  of  maintaining 
the  buildings  owned  by  the  business  and  occupied  by  it  as  a  home.  The  cost  of 
maintaining  the  buildings  is  one  of  the  operating  costs  of  the  business  of  the  same 
nature  as  rent. 

Debit   the   Building   Expense  Acconnt:  Credit  the  Building  Expense  Account: 

^  I.     For  amounts  paid  for  maintain-  *\  3.     For   adjustments   which    reduce 

ing    the    buildings,    such    as  the  maintenance  cost  as  shown 

painting,    papering,    reroofing  by  the  debit  side, 

with  the  same  kind  of  mate- 
rial, reflooring  with  the  same 
kind  of  material,  etc. 
][  2.     For  insurance,  taxes,  and  depre- 
ciation on  the  building. 

^  4.  The  Balance  of  the  Building  Expense  Account  shows  the  cost  to  the 
business  of  owning  its  own  home;  it  is  shown  on  the  Statement  of  Profit  and  Loss 
as  one  of  the  operating  costs  of  the  business  (Illustration  No.  93). 

If  an  income  is  derived  through  the  rent  of  any  part  of  the  building,  the  amounts  received  as 
rent  may  be  credited  to  the  Building  Expense  account  or  to  a  special  account  with  Building  Revenue. 
The  use  of  the  building  will  determine  the  expense  account  affected  by  the  cost  of  maintaining  it; 
unless  a  number  of  departments  are  maintained,  the  cost  of  owning  its  own  home  may  be  regarded 
by  the  business  as  an  administrative  cost. 

§  157.  Non-operating  Expense.  There  are  many  expenses  in  connection 
with  the  operations  of  the  business  which  may  occur  in  one  fiscal  period  but  not 
in  another;  these  include  interest  cost,  the  discount  deducted  by  customers  for 
prompt  remittance  for  sales  invoices,  attorneys'  fees  for  special  purposes,  and  many 
other  miscellaneous  expenses.  Interest  Cost  and  Sales  Discount  are  the  two  non- 
operating  expense  accounts  discussed  at  this  time. 


166  NON-OPERATING  EXPENSE  ACCOUNTS 

INTEREST  COST  ACCOUNT 

§  158.  The  Purpose  of  this  Account  is  to  show  the  expenses  incurred  by 
the  business  through  the  premiums  paid  for  the  use  of  money,  as  explained  in 
§  io6.  Interest  cost  is  one  of  the  expenses  of  the  business  because  it  represents  a 
service  cost  (for  the  use  of  money)  the  same  as  salaries  and  rent. 

Debit    the    Interest    Cost   Account:  Credit  the  Interest  Cost  Account: 

^  I.     For    interest    on    accounts    and  *\  2.     For  any  adjustments  which  re- 

notes  payable.  duce  the  cost  of  interest  shown 

by  the  debit  side. 
^  3.     The  Balance  of  the  Interest  Cost  Account  shows  the  net  cost  of  interest 
to  the  business;  it  is  shown  on  the  Statement  of  Profit  and  Loss  as  a  non-operating 
expense  (Illustration  No.  93). 

SALES  DISCOUNT  ACCOUNT 

§  159.  The  Purpose  of  this  Account  is  to  show  the  net  amount  of  dis- 
count resulting  from  customers  paying  sales  invoices  within  the  terms  of  discount. 
When  remittance  is  received  from  a  customer  within  the  terms  of  discount,  the 
amount  received  will  be  less  than  the  amount  debited  to  his  account  because  of 
the  discount  deducted.  One  asset  (the  customer's  account)  is  canceled  with  an- 
other asset  (cash),  but,  since  the  amount  of  the  latter  is  less  than  the  former,  there 
is  a  cost  to  the  business  for  this  collection.  This  cost  may  be  regarded  as  reducing 
the  returns  from  sales  or  as  a  deduction  from  income  in  the  same  manner  as  pur- 
chases discount  may  be  regarded  as  reducing  the  cost  of  merchandise  purchases 
or  as  a  profit  resulting  from  the  business  paying  its  bills  promptly.* 

Debit  the  Sales  Discount  Account:  Credit  the  Sales  Discount  Account: 

If  I.     For   the   discount   deducted   on  ^  2.     For  any  adjustments  which  re- 

sales   when    paid    within    the  duce  the  amount  of  discount 

terms    of    the    sales    invoices.  deducted     by     customers     as 

shown  by  the  debit  side. 
^  3.  The  Balance  of  the  Sales  Discount  Account  shows  the  net  amount  of 
discount  deducted  by  customers  for  the  prompt  payment  of  sales  invoices  during 
the  time  for  which  the  record  is  kept.  If  the  management  regards  sales  discounts 
as  a  non-operating  expense,  it  is  shown  as  such  on  the  Statement  of  Profit  and 
Loss  (Illustration  No.  93) ;  if  sales  discount  is  regarded  as  a  deduction  from  the 
returns  from  sales,  it  is  deducted  from  the  gross  sales  on  the  Statement  of  Profit 
and  Loss.  It  is  usually  deducted  from  the  gross  sales  in  the  preparation  of  the 
income   tax   return.     (Office  Decision    146.— Sec.   234 — Art.  561). 

*Sales  discount  is  treated  as  a  non-operating  expense  in  the  exercises  in  this  text  and  the 
practice  sets,  and  as  a  deduction  from  gross  sales  on  the  income  tax  return. 

Exercise  No.  65,  Sales  and  Sales  Discount. 

The  Excelsior  Mfg.  Co.,  Providence,  completed  the  following  transactions 
with  the  Boot  Shop,  a  customer  in  Springfield,  during  the  first  six  months  of  1923: 
Jan.  ID,  sale  No.  26421,  terms  3/10,  n/30,  $276.50;  Jan.  19,  received  check  from 
the  Boot  Shop  in  full  of  sale  of  the  loth;  Mar.  6,  sale  No.  27491,  terms  2/30, 
n/6o,  $279.60;  Mar.  26,  sale  No.  27671,  terms  4/10,  n/60,  $125.16;  Apr.  5,  re- 
ceived check  from  the  Boot  Shop  in  full  of  account;  May  3,  sale  No.  30009,  terms 
2/30,  n/6o,  $198.65;  May  18,  sale  No.  31 117,  terms  i /lo,  n/30,  $261.48;  June  2, 
received  check  from  the  Boot  Shop  in  full  of  account. 

The  student  is  required  to  (a)  make  in  journal  form  the  entries  required  to 
record  the  transactions  on  the  books  of  the  Excelsior  Mfg.  Co.,  allowing  discount 
when  check  was  received  within  the  discount  period,  (b)  post,  and  (c)  take  a  Trial 
Balance  of  balances. 


EXERCISES 


167 


Exercise  No.  66,  Recording  Transactions  with  Sales  and  Sales  Discount. 

Show  (a)  the  entry  in  journal  form  when  the  sales  invoice  shown  below  was 
issued;  (b)  the  entry  in  journal  form  when  the  check  shown  below  was  received  in 
payment  for  the  invoice,  less  discount;  and  (c)  the  posting  of  these  entries  to  the 
proper  accounts. 


0 

9120 

V y 

June  14,  192 

Mason  Book  &  Stationery  Co., 
4179  Llain  St. 
Berwick,  Pa, 

2/10,  n/30 

PP  4th  zone 

10  rms.  8|-  X  11  Penmanship  Paper 
5  "   Balance  Sheet  Paper 

/■ — X 

1.20     12  00 

5.00     25  00      27  00 

rD 

Postage                  80 

£7  80 

Carbon  Copy  of  Sales  Invoice  Subject  to  Discount. 


I 


Be r>vick.  Pa.     J^^^q  20 19  No.  le^ 

The  Bekhtck^atioival  Bank  eo  713 


60-713 

Pavto      South-Western  Publishing  Cc- 
Tw.enty- seven  and  26/lQO  ------  - 


OR  ORDER  $27.26 

'    ~    "    "    "    "      DOIXAUS 


SAFE  DEPOSIT  BOXES 

FOR  RE^a 


MASON  BOOK  AND  STATIONERY  CO. 
per  ?y^   ??^.    ??^c 


Check  in  Payment  of  Sales  Invoice  Less  Discount. 


Exercise  No.   67,   Recording  Transactions  witli  Expense. 

Record  direct  in  the  accounts  discussed  in  this  chapter,  the  following  transac- 
tions, performed  by  A.  R.  Pendleton  &  Co.,  wholesale  merchants: 


July      I.     Paid  rent,  $250.00.     (§  155.) 

2.     Gave  A.  R.  Pendleton  a  check  for 


.50,  expenses  on  a  buying  trip. 


i68  QUESTIONS 

8.  Gave  Waite  &  McBride  a  check  in  payment  for  our  note  No.  ii  due 

today,    and   $3.25    interest   on    the   same. 

9.  Paid  $2.25  express  on  shipment  to  an  out-of-town  customer,  our  agree- 

ment  being   to   deliver   the   merchandise  without   extra   charge. 

11.  Paid   for  the   following  services:    telephone,   $12.50;    lighting,   $18.30; 

repairs  on  delivery  truck,  $12.75. 

12.  Payroll:    office,  $280.00;   store,  $600.00;   drivers,  $150.00. 

15.  Paid  the  City  Ice  Co.  $6.00,  ice  for  water-cooler. 

16.  Bought  ink,  carbon  paper  and  rubber  stamps  for  use  in  the  office,  $10.00. 

18.  Received  a  cashier's  check  from  the  Merchants  National  Bank  in  pay- 

ment for  note  left  for  collection,  less  50c  collection  charges.     (§  155.) 

19.  Paid  $3.50  for  installing  plate  glass  store  window. 

21.  Returned  a  part  of  the  office  supplies  purchased  on  the  i6th  and  re- 

ceived  credit  for  $1.50. 

22.  Paid   the  Times-Star  $695.60  for  advertising  space. 

25.  Gave  A.  R.   Pendleton  a  check  for  $21.75,  expenses  on  a  selling  trip. 

26.  Payroll:     office,  $280.00;   store,  $600.00;   drivers,  $150.00. 

28.  Received  a  check  from  B.  M.  Lardner  in  full  of  account,  less  $6.38 

discount. 

29.  Gave  Harris  Bros,  our  note  in  full  of  account;    the  face  of  this  note 

included  $5.15  interest. 
31.  Monthly  payroll:  purchasing  agent,  $150.00;  traveling  salesmen, 
$750.00;  general  manager,  $300.00;  advertising  agent,  $150.00. 
At  the  close  of  the  fiscal  period,  the  estimated  depreciation  is  as  follows: 
office  equipment,  $100.00;  store  fixtures,  $225.00;  delivery  equip- 
ment, $450.00;  The  estimated  loss  on  uncollectible  accounts  re- 
ceivable is  $135.60. 


QUESTIONS 

1.  (a)  Why  does  the  business  man  need  to  know  the  cost  of  buying  goods? 

(b)  Would  you  consider  it  advisable  to  include  the  cost  of  buying  as  a  part 
of  the  cost  of  merchandise  purchased?    (c)  Why? 

2.  Why  is  it  necessary  to  record   the  cost  of  hauling  merchandise  purchased 

from  the  station  to  the  store  separate  from  the  cost  of  hauling  merchandise 
sold  from  the  store  to  the  customer? 

3.  If  the  business  owns  its  own  home,  will  the  balance  of  the  Building  Expense 

account  be  considered  as  the  total  cost  of  rent  or  will  interest  on  the  invest- 
ment in  the  building  be  added? 

4.  Why  are  expenses  classified  as  "operating"  and   "non-operating?" 

5.  Why  do  merchants  deliver  to  their  customers  the  merchandise  sold? 

6.  Why  is  the  delivery  cost  a  part  of  the  selling  cost? 

7.  Under  what  conditions  would  it  be  advisable  to  record  the  cost  of  advertising 

separate  from  the  selling  cost? 

8.  Why  is  interest  paid  for  the  use  of  money  an  expense  to  the  business? 

9.  (a)  What  are  the  two  methods  of  showing  sales  discount  on  the  Statement 

of  Profit  and  Loss?     (b)   Explain  each. 

10.     If  a  partner  devotes  his  time    equally    to    the    buying   and    selling    of    mer- 
chandise, what  accounts  are  debited  for  his  salary? 


Chapter  XVII 

CONTROLLING  ACCOUNTS 

The  Purpose  of  this  Chapter  is  to  explain  controlling  accounts,  one  of  the 
most  important  time-savers  applicable  to  the  work  of  the  bookkeeper.  The  busi- 
ness man  is  interested  in  time-saving  methods  because  they  reduce  the  cost  of 
operating  his  business;  the  bookkeeper  is  interested  in  time-saving  methods  be- 
cause they  increase  his  efficiency. 

§  160.  A  ControUing  Account  is  one  which  represents  in  total  the  facts 
shown  in  detail  in  a  number  of  other  accounts.  Controlling  accounts  are  used 
most  frequently  with  accounts  receivable  and  accounts  payable  because  a  great 
number  of  accounts  are  required  to  record  the  transactions  with  customers  and 
creditors.  If  the  accounts  with  customers  and  creditors  can  be  eliminated  from 
the  Trial  Balance,  the  work  of  the  bookkeeper  in  preparing  the  Trial  Balance  will 
be  greatly  reduced. 

If  there  are  in  the  ledger  one  hundred  accounts  with  creditors  and  two  hundred 
accounts  with  customers,  and  twenty-five  accounts  which  relate  to  the  operations 
of  the  business,  the  Trial  Balance  will  contain  325  accounts;  if  the  one  hundred 
accounts  with  creditors  can  be  represented  by  one  account  and  the  two  hundred 
accounts  with  customers  by  one  account,  then  the  Trial  Balance  will  contain  only 
twenty-seven  accounts.  This  elimination  can  be  effected  by  having  an  account 
with  Accounts  Payable  which  will  show  in  total  the  transactions  recorded  in  all 
of  the  accounts  with  creditors,  and  an  account  with  Accounts  Receivable  which 
will  show  in  total  the  transactions  recorded  in  all  of  the  accounts  with  customers. 
When  this  plan  is  followed,  it  is  customary  to  open  the  accounts  with  creditors  and 
with  customers  in  separate  divisions  of  the  main  ledger  or  in  separate  ledgers. 

The  purpose  of  the  controUing  account  is  to  save  time  in  taking  the  Trial  Balance  and  in  check- 
ing the  posting  in  case  the  Trial  Balance  does  not  balance.  This  is  made  clear  by  reference  to  Illus- 
tration No.  70  and  the  explanation  in  connection  therewith. 


ACCOUNTS  RECEIVABLE  ACCOUNT 

§  161.  The  Purpose  of  this  Account  is  to  show  in  total  the  detailed 
debits  and  credits  to  accounts  with  customers  in  another  part  of  the  same  ledger 
or  in  a  separate  ledger.  If  all  the  transactions  with  customers  are  recorded  in 
this  account,  it  will  not  be  necessary'  to  show  the  various  accounts  with  customers 
on  the  Trial  Balance.  This  is  a  controlling  account  because  it  shows  in  total  the 
transactions  recorded  in  a  group  of  related  accounts.  When  only  one  ledger  is 
needed  for  the  accounts  with  customers,  only  one  controlling  account  with 
Accounts  Receivable  is  necessary.  When  the  operations  of  the  business  are  exten- 
sive, the  accounts  receivable  ledgers  may  be  grouped  by  territories,  in  which  case 
the  name  of  the  controlling  account  will  not  be  Accounts  Receivable,  but  the 
territory  represented  by  the  accounts  in  the  ledger  as  "City  Ledger,"  "Texas 
Ledger,"  "California  Ledger,"  "Southern  Ledger,"  etc.  It  is  not  necessary  to 
keep  a  separate  controlling  account  with  each  ledger,  as  one  controlling  account 
may  control  several  ledgers,  but  it  is  better  to  have  a  controlling  account  with 
each  because  of  the  time  saved  in  detecting  errors. 

169 


170 


CONTROLLING  ACCOUNTS 


Controlling  Account 
ACCOUNTS  RECEIVAELS 


ACCOUITTS  RECEIVABLE  PROOF 


Accounts  Receivable  Ledger 


A  -  Dr.  §908.50,  Cr. 

B  -  Dr.  I2IE.OO,  Cr. 

C  -  Dr.  |318.25,  Cr. 

D  -  Dr.  §238.50.  Cr. 


S775.OO,  Bal.  $133.50 

1117.70,  Bal.  I  97,30 

I16O.9O,  Bal.  |l57.35 

^154.50,  Bal.  |_14^Q.0 


Totals  ,$1680.25,    ,$1208.10. 


.$  472.15, 


Controlling  Aooount 

Accounts  Receivable  Dr. 
Accounts  Receivable  Cr. 

t-  Balance 


$1680.25 
I12O8.IO 

$  472.15 


Illustration  No.  70,  Chart  Showing  Operation  of  a  Controlling  Account. 

EXPLANATION.  This  chart  contains  a  record  of  ten  sales  in  the  sales  journal,  two  cash 
payments  to  customers  in  the  cash  book,  one  debit  to  a  customer  in  the  general  journal,  eight  cash 
receipts  from  customers  in  the  cash  book,  and  five  receipts  of  assets  other  than  cash  from  customers 
in  the  general  journal;  also  an  account  in  the  general  ledger  with  Accounts  Receivable,  the  separate 
accounts  with  the  four  customers  in  the  accounts  receivable  ledger,  and  the  proof  of  the  subsidiary 
ledger  at  the  end  of  the  month.  The  red  lines  indicate  posting  from  the  books  of  original  entry  to 
the  accounts  in  the  accounts  receivable  ledger,  the  posting  of  the  totals  to  the  Accounts  Receivable 
account  in  the  general  ledger,  and  the  relation  of  the  proof  to  the  accounts  in  the  accounts  receivable 
ledger  and  the  Accounts  Receivable  account  in  the  general  ledger.  The  dates  are  omitted  and 
letters  are  used  to  indicate  the  names  of  the  customers  to  conserve  space.  It  is  assumed  that  cash 
received  from  customers  is  entered  in  a  special  column  on  the  receipts  side  of  the  cash  book,  and 
that  credit  amounts  to  customers  recorded  in  the  general  journal  are  entered  in  a  special  column. 
The  two  amounts  recorded  on  the  payments  side  of  the  cash  book  are  posted  to  accounts  in  the  ac- 
counts recei\able  ledger  and  are  posted  separately  to  the  controlling  account;  this  is  also  true  of 
the  one  amount  recorded  in  the  general  journal  as  a  debit  to  an  account  receivable. 


RESERVE  FOR  DOUBTFUL  ACCOUNTS 


171 


Debit  the  Accounts  Receivable  Accotmt: 
T[  I.  For  the  total  of  the  sales  journal 
at  the  end  of  the  month. 
(If  amounts  to  be  debited  to  accounts 
in  the  accounts  receivable  ledger  are 
recorded  in  the  general  journal  or  on 
the  payments  side  of  the  cash  book, 
each  amount  should  be  posted  to  the 
Accounts  Receivable  account  at  the 
time  it  is  posted  to  the  account  in  the 
accounts  receivable  ledger.) 


Credit  the  Accounts  Receivable  Account: 


^  2.  For  each  amount  recorded  in  the 
general  journal  or  on  the  re- 
ceipts side  of  the  cash  book 
as  a  credit  to  an  account  in  the 
accounts  receivable  ledger; 
these  amounts  are  usually  of 
sufficient  frequency  to  require 
a  special  column  in  each  of 
these  books  of  original  entry, 
in  which  case  the  posting  is  at 
the  end  of  the  month. 

%  3.  The  Balance  of  the  Accounts  Receivable  Account  shows  the  total  due 
from  all  customers  and  must  be  the  same  as  the  total  of  the  various  balances  shown 
in  the  accounts  receivable  ledger.  It  is  a  current  asset  and  is  shown  as  such  on 
the  Balance  Sheet,  being  listed  after  Cash  and  Notes  Receivable  (111.  No.  92). 

\  4.  Accounts  Receivable  Proof.  The  Trial  Balance  is  made  from  the  accounts 
in  the  general  ledger,  the  balance  of  the  Accounts  Receivable  account  being  used 
instead  of  the  various  balances  of  the  accounts  in  the  accounts  receivable  ledger. 
When  the  correctness  of  the  posting  to  the  general  ledger  has  been  proved  by  the 
Trial  Balance,  it  is  necessary  to  prove  the  correctness  of  the  posting  to  the  accounts 
in  the  accounts  receivable  ledger.  The  total  of  all  the  debit  balances  in  the  accounts 
receivable  ledger  less  any  credit  balances  should  be  the  same  as  the  balance  of  the 
Accounts  Receivable  account  in  the  general  ledger. 

If  a  sale  to  a  customer  is  recorded  in  the  sales  journal  as  $26.10  but  is  posted  to  the  account 
in  the  accounts  receivable  ledger  as  $26.00,  it  is  quite  evident  that  there  will  be  a  discrepancy  be- 
tween the  balance  of  the  Accounts  Receivable  account  in  the  general  ledger  and  the  total  of  the 
balances  in  the  accounts  receivable  ledger.  It  is  to  detect  errors  of  this  nature  that  a  proof  is  made 
of  the  posting  to  the  accounts  in  the  accounts  receivable  ledger. 


RESERVE  FOR  DOUBTFUL  ACCOUNTS  ACCOUNT 

§  162.  The  Purpose  of  this  Account  is  to  show  the  reserve  set  up  to  take 
care  of  the  possible  loss  resulting  from  failure  to  collect  from  customers.  No 
matter  how  careful  a  credit  man  may  be  in  extending  credit,  some  of  the  accounts 
are  almost  sure  to  prove  uncollectible.  Unless  this  is  taken  into  consideration  at 
the  time  the  Balance  Sheet  is  prepared,  the  report  to  the  management  will  show 
an  inflated  value  for  the  asset  Accounts  Receivable. 

While  the  amount  of  the  reserve  may  be  more  or  less  than  is  necessary  to  take  care  of  the  loss 
due  to  uncollectible  accounts,  yet  it  does  indicate  to  the  management  that  this  loss  has  been  taken 
care  of  as  far  as  possible.  The  reserve  is  usually  based  on  a  percentage  of  the  total  sales  on  account 
or  the  total  amount  due  from  customers  at  the  close  of  the  period.  The  192 1  Revenue  Act  provides 
a  deduction  for  "debts  ascertained  to  be  worthless  and  charged  oft"  within  the  taxable  year  (or,  in 
the  discretion  of  the  Commissioner,  a  reasonable  addition  to  a  reserve  for  bad  debts)." 

Debit  the  Reserve  for  Doubtful  A  ccounts  Credit  the  Reserve  for  Doubtful  A  ccounts 
Account:  Account: 

^i.  For  the  amount  that  cannot  be  H  2.  At  the  close  of  each  fiscal  period, 
collected     from     a     customer,  for    the    amount    of    reserve 

whether  it  is  a  part  or  all  of  designated    by   the   owner   or 

the  balance  of  his  account.  management  of  the  business. 

^  3.  The  Balance  of  the  Reserve  for  Doubtful  Accounts  Account  shows  the 
net  amount  of  the  reserve  available  to  take  care  of  worthless  accounts;  it  is  shown 
on  the  Balance  Sheet  as  a  deduction  from  Accounts  Receivable  so  that  the  man- 
agement may  know  the  amount  due  from  customers,  the  estimated  loss,  and  the 
net  amount  that  it  is  expected  will  be  collected. 


1/2 


ACCOUNTS  PAYABLE  ACCOUNT 


^  4.  Entry  to  Set  Up  Reserve  for  Doubtful  Accounts.  At  the  close  of  each 
fiscal  period  an  entry  is  made  in  the  general  journal  to  record  the  estimated  loss 
on  doubtful  accounts  and  to  set  up  a  reserve  to  take  care  of  this  loss.  The  Loss 
on  Doubtful  Accounts  account  (§  154)  is  debited  and  the  Reserve  for  Doubtful 
Accounts  account  credited.  If  the  total  amount  owed  the  business  by  customers, 
as  shown  by  the  balance  of  the  Accounts  Receivable  account,  is  $5,575.00,  and 
it  is  estimated  that  one  per  cent  of  these  accounts  is  uncollectible,  the  entry  in 
journal  form  will  appear  as  in  the  illustration  below. 


T      T 


■^^  7-^. 


y- 


/' 


The  Loss  on  Doubtful  Accounts  account  is  regarded  as  a  selling  expense  as  explained  in  §  154. 


ACCOUNTS  PAYABLE  ACCOUNT 

§  163.  The  Purpose  of  this  Account  is  to  show  in  total  the  detailed 
debits  and  credits  to  accounts  with  creditors  in  another  part  of  the  same  ledger 
or  in  a  separate  ledger.  If  all  the  transactions  with  creditors  are  recorded  in  this 
account,  it  will  not  be  necessary  to  show  the  various  accounts  with  creditors  onthe 
Trial  Balance.  This  is  a  controlling  account  because  it  shows  in  total  the  trans- 
actions recorded  in  detail  in  a  group  of  related  accounts. 

When  the  operations  of  the  business  are  extensive  and  cover  a  wide  territory,  the  accounts 
payable,  like  the  accounts  receivable,  may  be  kept  in  separate  ledgers,  each  of  which  is  given  a  title 
designating  a  specific  territory.  A  controlling  account  may  be  kept  with  each  ledger  or  with  a  group 
of  ledgers. 


Debit  the  Accounts  Payable  Account: 
^  I.  For  each  amount  recorded  in 
the  general  journal  or  on  the 
payments  side  of  the  cash 
book  as  a  debit  to  an  account 
in  the  accounts  payable  led- 
ger; these  amounts  are  usu- 
ally of  sufificient  frequency  to 
require  a  special  column  in 
each  of  these  books  of  original 
entry,  in  which  case  the  post- 
ing is  at  the  end  of  the  month. 


Credit  the  Accounts  Payable  Account: 
\  2.     For  the   total   of  the  purchases 
journal    at    the    end    of    the 
month. 

(If  amounts  to  be  credited  to 
accounts  in  the  accounts  payable 
ledger  are  recorded  in  the  general 
journal  or  on  the  receipts  side  of 
the  cash  book,  each  should  be 
posted  to  the  Accounts  Payable 
account  at  the  time  it  is  posted  to 
the  account  in  the  accounts  payable 
ledger.) 


Tl  3.  The  Balance  of  the  Accounts  Payable  Account  shows  the  total  owed  to 
all  creditors  and  must  be  the  same  as  the  total  of  the  various  balances  shown  in 
the  accounts  payable  ledger.  It  is  a  current  liability  and  is  shown  as  such  on  the 
Balance  Sheet  being  listed  after  Notes  Payable  (Illustration  No.  92). 

\  4.  Accounts  Payable  Proof.  The  accounts  payable  are  proved  in  the  same 
manner  as  accounts  receivable.    (§  161,  H  4.) 

Ledgers  containing  accounts  with  customers  and  with  creditors  are  referred  to  as  subsidiary 
ledgers.  Only  those  accounts  resulting  from  posting  the  sales  journal  and  the  purchases  journal  are 
opened  in  the  subsidiary  ledgers;  other  personal  accounts  resulting  from  sales  and  purchases  of 
property  belonging  to  the  business  are  opened  in  the  general  ledger. 


OUTLINE  OF  ACCOUNTS  173 

OUTLINE  OF  ACCOUNTS 

§  164.  The  Outline  below  includes  those  accounts  required  in  connection 
with  the  recording  of  transactions  in  the  C.  W.  Keeland  &  Co.  practice  set;  refer- 
ences are  given  to  the  discussion  of  those  accounts  which  have  not  been  developed 
in  this  or  preceding  chapters.  The  classification  is  the  same  as  that  in  the  first 
division   of  this   text. 

OUTLINE   OF   ACCOUNTS   USED   IN   THE   PARTNERSHIP   SET. 

Cash. 

Merchandise  Inventory. 

Current  Assets |  Notes  Receivable. 

Accounts  Receivable. 

Accrued  Interest  Earned  (§  193). 

[Land. 

I  Buildings. 

Fixed  Assets Office  Equipment. 

Store  Fixtures. 
[Delivery  Equipment. 

Deferred  Charges  to  Operations Lg^^^^"PP  ^^^' 

[Notes  Payable. 

Current  Liabilities Accounts  Payable. 

I  Accrued  Wages  (§197). 
[Accrued  Interest  Cost  (§  201). 

[Reserve  for  Depreciation  of  Office  Equipment. 
Reserves  j  Reserve  for  Depreciation  of  Store  Fixtures. 

I  Reserve  for  Depreciation  of  Delivery  Equipment. 
[Reserve  for  Doubtful  Accounts. 

Capital f Partner,  Capital. 

[Partner,  Personal. 

Inventory. 

Purchases. 

Purchases  Returns  and  Allowances. 

Operating  Income J  Freight  In. 

j  Sales. 

I  Sales  Returns. 

[Sales  Allowances. 

[Selling  Expense. 
[Traveling  Expense. 

Operating  Expense \  Loss  on  Doubtful  Accounts. 

I  Administrative  Expense. 
[Building  Expense. 

Non-Operating  Income . . . .  /Interest  Earned. 

[Sales  Discount. 

[Interest  Cost. 
Non-Operating  Expense.  .  ■-! Purchases  Discount. 

[Loss  on  Dead  Horse  (§  157). 


174 


EXERCISES  IN  CONTROLLING  ACCOUNTS 


Exercise  No.  68,  Accounts  Receivable  Proof. 

Sales  Journal — May 


2 

W.  D.  Jayne 

Springfield 

Account 

I 

$  450 -oo 

3 

R.  W.  Starling 

St.  Louis 

2 

185.50 

5 

C.  H.  Watt 

Bristol 

3 

79-30 

5 

R.  L.  Sutherland 

Richmond 

4 

328.40 

8 

0.  R.  Martin 

Lincoln 

5 

211. 15 

9 

R.  W.  Starling 

St.  Louis 

6 

137-50 

12 

J.  A.  Moore 

Clifton 

7 

50.30 

15 

R.  L.  Sutherland 

Richmond , 

8 

293-35 

19 

C.  H.  Watt 

Bristol 

9 

45-95 

26 

R.  W.  Starling 

Sales,  Cr. — 

St.  Louis 

Accounts  Receivable,  Dr. 

II 

10 

203.50 

31 

$1,984.95 

The  student  is  required  (a)  to  post  the  individual  sales  to  the  customers' 
accounts  in  the  accounts  receivable  ledger;  (b)  to  post  the  total  to  the  Accounts 
Receivable  and  Sales  accounts;  (c)  to  show  the  proof  of  the  individual  accounts 
with  the  Accounts  Receivable  account. 

Exercise  No.  69,  Accounts  Payable  Proof. 

Purchases  Journal — May 


3 

Jemison  &  Co. 

City 

2%  10  days 

I 

$  895.75 

7 

Jewell  Tea  Co. 

St.  Albans 

account 

2 

50.00 

7 

Ralph  0.  Wells 

City 

account 

3 

573.20 

9 

Keaton  Grocery  Co. 

Manchester 

3%  10  days 

4 

1,542.18 

14 

Tracy  &  Tracy 

Newport 

1%  30  days 

5 

627.35 

17 

Keaton  Grocery  Co. 

Manchester 

3%  10  days 

6 

956.31 

19 

Jemison  &  Co. 

City 

2%  10  days 

7 

193-75 

23 

Tracy  &  Tracy 

Newport 

1%  30  days 

8 

359-40 

26 

Keaton  Grocery  Co. 

Manchester 

3%  10  days 

9 

1,894.26 

28 

Jewell  Tea  Co. 

Purchases,  Dr. — 

St.  Albans 

Accounts  Payable,  Cr. 

account 

10 

75.00 

31 

$7,167.20 

The  student  is  required  (a)  to  post  the  individual  purchases  to  the  creditors' 
accounts  in  the  accounts  payable  ledger;  (b)  to  post  the  total  to  the  Purchases 
and  Accounts  Payable  accounts;  (c)  to  show  the  proof  of  the  individual  accounts 
with  the  Accounts  Payable  account. 

Exercise  No.  70,  Construction  of  Charts  for  Controlling  Accounts. 

Prepare  two  charts  similar  to  Illustration  No.  70,  one  for  accounts  receivable 
and  the  other  for  accounts  payable,  from  the  following  transactions  performed 
during  the  month  of  March  by  Gary  &  Burke,  a  partnership  engaged  in  selling 
woolen  cloth.  Use  a  sheet  of  paper  S^/o  x  11  inches  for  each  chart,  allowing  two 
inches  for  the  controlling  account  at  the  top,  six  inches  for  the  personal  accounts 
in  the  center,  and  two  inches  for  the  proof  at  the  bottom.  Complete  all  work  with 
a  pen  unless  permitted  to  use  pencil. 

Mar.    I.     Purchased  from  Holbrook  &  Thoma,  City,  on  account,  merchandise, 
$1,298.50. 
3.     Purchased  from  the  Spencer  Woolen  Mills  Co.,  Taunton,  terms,  2% 
10  days,  merchandise,  $563.70.    They  prepaid  the  freight  on  this  ship- 
ment, $4.95,  which  was  added  to  the  amount   on    the   invoice. 
(Continued  on  page.  I /^.) 


EXERCISES  IN  CONTROLLING  ACCOUNTS  175 

{Exercise  No.  70 — Continued  from  page  174.) 

6.  Paid  Holbrook  &  Thoma  $750.00  to  apply  on  account. 

7.  Sold  P.  M.  Penrod,  61  Ward  Ave.,  City,  on  account,  merchandise,  $356.20. 

8.  Purchased  from  Holbrook  &  Thoma,  City,  terms,  1%  30  days,  mer- 

chandise, $925.45. 

9.  Sold  J.  S.  Henry,  231 1  Park  Ave.,  City,  on  account,  merchandise,  $85.00. 

10.  Received  $200.00  from  P.  M.  Penrod  to  apply  on  account. 

11,  Sold  merchandise  on  account  as  follows: 

J.  S.  Henry,  2311  Park  Ave.,  City,  $112.50. 
O.  J.  Merrell,  126  Beatty  St.,  City,  $516.60. 
Received  in  part  payment  of  the  sale  to  O.  J.  Merrell  a  sixty-day  note 
for  $200.00,  signed  by  D.  P.  Hart,  dated  January  25,  with  interest 
at  6%  from  date;  allowed  Mr.  Merrell  credit  for  the  interest  accrued 
on  the  note  to  date. 

13.  Paid  the  Spencer  Woolen  Mills  Co.  $557.38  in  full  for  purchase  of  the 

3d,  less  discount,  and  freight  on  the  same. 
Sold  J.  S.  Henry,  231 1  Park  Ave.,  City,  75c  worth  of  cord  which  was 
purchased  for  use  in  the  store.     Charge  this  to  his  account. 

14.  Received  $50.00  from  J.  S.  Henry  to  apply  on  account. 

Sold  O.  J.   Merrell,    126  Beatty  St.,   City,  on  account,   merchandise, 

$141.50. 
Received  notice  of  credit  from  Holbrook  &  Thoma  for  $70.00,  value  of 
two  bolts  of  cloth  purchased  on  the  8th  and  returned  per  agreement. 
16.     Purchased  from  Bowman  Bros.,  West  End,  on  account,  merchandise, 

$1,809.07. 
18.     Sold  P.  M.  Penrod,  61  Ward  Ave.,  City,  on  account,  merchandise,  $663.96. 
Notified  Bowman  Bros,  of  an  error  of  $2.00  in  making  the  extensions 
for  purchase  of  the   i6th,  and  received  instructions  from  them   to 
debit  their  account  for  this  amount. 

20.  Received  $141.50  from  O.  J.  Merrell  in  full  for  sale  of  the  14th. 
Sold  merchandise  as  follows: 

O.  J.  Merrell,  126  Beatty  St.,  City,  on  account,  $245.15. 
M.  W.  Grinnell,  Silvergrove,  terms,  2%  10  days,  $1,514.80. 
Paid  Bowman  Bros.  $750.00  to  apply  on  account, 

21,  Received  $100.00  from  J.  S.  Henry  to  apply  on  sale  of  the  nth,  and 

$500.00  from  P,  M.  Penrod  to  apply  on  account. 
Paid  Holbrook  &  Thoma  $2,000.00  to  apply  on  account. 

22,  Sold  J.  S.  Henry,  231 1  Park  Ave.,  City,  on  account,  merchandise,  $125.60. 

23.  Purchased  from  the  Spencer  Woolen  Mills  Co.,  Taunton,  terms,  2%  10 

days,  merchandise,  $342.50.     They  prepaid  freight  on  this  shipment, 
$3.45,  which  was  added  to  the  amount  on  the  invoice. 
O.  J,  Merrell  reported  that  there  was  an  error  of  $1.00  in  his  favor  in 
the  extensions  for  sale  of  the  20th.    Debit  his  account  with  the  $1.00. 

24,  Sold  P.  M.  Penrod,  61  Ward  Ave.,  City,  on  account,  merchandise,  $62.35. 
Allowed  J.  S.  Henry  credit  for  $35.00,  value  of  one  bolt  of  cloth  sold 

him  on  the  22d  and  returned. 

25.  Sold  J.  S.  Henry,  23 11  Park  Ave.,  City,  on  account,  merchandise,  $284.50. 
Received  credit  from  the  Spencer  Woolen  Mills  Co,  for  $15.00  because 

part  of  the  merchandise  purchased  from  them  on  the  23d  was  40  per 
cent  cotton  when  our  order  specified  all  wool. 
Allowed  P.  M.  Penrod  credit  for  $5.00  on  account  of  an  error  in  our 
favor  in  extensions  for  sale  of  the  24th. 
27.     Purchased  from  Holbrook  &  Thoma,  City,  terms,   1%  30  days,  mer- 
chandise, $1,625.85. 

(Concluded  on  page  176.) 


176  QUESTIONS 

{Exercise  No.  70 — Continued  from  page  175.) 

27.  Sold  J.  S.  Henry,  231 1   Park  Ave.,  City,  50c  worth  of  stamps  which 

were  purchased  for  use  in  the  store.     Charge  this  to  his  account. 
Received  $12.50  from  J.  S.  Henry  in  full  for  sale  of  the  nth,  and  $200.00 
from  P.  M.  Penrod  to  apply  on  sale  of  the  i8th. 

28.  Accepted   a   thirty-day  draft   for  $500.00,   drawn   on   us   by   Bowman 

Bros.,  to  apply  on  purchase  of  the  i6th. 
Received  $315.10  from  O.  J.  Merrell  in  full  for  sale  of  the  nth. 
Sold  J.  S.  Henry,  231 1  Park  Ave.,  City,  on  account,  merchandise,  $71.40. 

Per  Mr.  Henry's  instructions,  shipped  this  merchandise  by  prepaid 

express  to  A.  B.  Knox,  Clinton;    debit    Mr.    Henry's   account   with 

$1.40,  cash  paid  for  the  express  charges. 

29.  Received  a  check  for  $1,000.00  from  M.  W.  Grinnell  in  part  payment 

for  sale  of  the  20th;   allowed  him  discount  on  this  payment  per  terms 
of  the  sale. 
Sold  P.  M.  Penrod,  61  Ward  Ave.,  City,  on  account,  merchandise,  $427.89. 

30.  Received  $100.00  from  J.  S.  Henry  to  apply  on  account. 

Received  notice  of  credit  from  Holbrook  &  Thoma  for  $33.50,  value  of 
one  bolt  of  cloth  returned  per  agreement. 

31.  Sold   M.   W.   Grinnell,   Silvergrove,    terms,   2%  10  days,    merchandise, 

$165.75- 
Received  $90.60  from  J.  S.  Henry  in  full  for  sale  of  the  22d,  and  $300.00 
from  P.  M.  Penrod  to  apply  on  sale  of  the  29th. 

QUESTIONS 

1.  If  there  is  a  difference  of  27c  between  the  total  of  the  balances  in  the  accounts 

receivable  ledger  and  the  balance  of  the  Accounts  Receivable  account  in 
the  general  ledger,  how  will  the  bookkeeper  locate  the  error? 

2.  If  an  account  in  the  accounts  receivable  ledger  which  shows  a  balance  of 

$10.00  is  ruled,  how  will  the  bookkeeper  discover  the  error? 

3.  If  all  the  accounts  in  the  accounts  payable  ledger  are  in  balance,  how  will  the 

Accounts  Payable  account  in  the  general  ledger  appear? 

4.  If  a  creditor  agrees  to  deliver  merchandise  purchased  and,  when  this  is  re- 

ceived, the  freight  has  not  been  paid,  how  will  the  check  given  the  railroad 
company  in  payment  for  the  freight  be  recorded  and  posted  if  a  controlling 
account  is  kept  with  Accounts  Payable? 

5.  If  a  customer  requests  that  the  freight  on  a  shipment  of  merchandise  sold  to 

him  be  prepaid  and  charged  to  his  account,  how  will  the  check  given  the 
railroad  company  in  payment  for  this  freight  be  recorded  and  posted  if  a 
controlling  account  is  kept  with  Accounts  Receivable? 

6.  In  what  way  does  the  use  of  a  controlling  account  with  Accounts  Receivable 

make  the  work  of  the  bookkeeper  more  efficient? 

7.  Why  are  special  columns  provided  in  books  of  original  entry  for  controlling 

accounts? 

8.  What  special  columns  are  required  in  the  cash  book  and  general  journal  when 

controlling  accounts  are  kept  with  Accounts  Receivable  and  Accounts 
Payable? 

9.  If  a  check  is  given  in  payment  for  freight  on  merchandise  purchased  and 

debited  to  the  Freight  In  account,  what  effect  does  this  have  on  the  con- 
trolling account  with  Accounts  Payable?  Give  reason  for  answer. 
10.  (a)  If  a  creditor  by  request  prepays  the  freight  on  merchandise  purchased 
and  includes  the  amount  in  the  purchases  invoice,  how  will  the  transaction 
be  recorded  and  posted  if  a  controlling  account  is  kept  with  Accounts 
Payable?  (b)  How  will  the  entry  be  made  and  posted  if  no  controlling 
account  is  maintained? 


J 


Chapter  XVIII 

BOOKS  OF  ACCOUNT 

The  Purpose  of  this  Chapter  is  to  explain  and  illustrate  the  use  of  special 
columns  in  the  cash  book  and  general  journal.  The  use  of  special  columns  is  a 
great  time-saver  for  the  bookkeeper,  hence  should  be  understood  by  the  student 
of  bookkeeping.  The  explanation  of  special  columns  will  enable  the  student  to 
appreciate  the  time  saved  through  the  use  of  controlling  accounts. 

§  165.  The  Books  of  Original  Entry  usually  required  in  connection  with 
the  recording  of  transactions  for  a  mercantile  business  consist  of  a  purchases  journal, 
sales  journal,  cash  book,  and  general  journal.  The  purpose  of  each  of  these  blanks 
is  always  the  same,  but  the  form  of  ruling  may  vary  with  the  particular  needs  of 
the  business.  The  books  of  account  required  in  connection  with  the  exercise  at 
the  conclusion  of  this  chapter  and  the  first  practice  set  (C.  W.  Keeland  &  Co.) 
which  is  separate  from  this  text,  are  explained  and  illustrated  in  the  discussion 
which  follows. 

§  166.  The  Purchases  Journal  is  a  book  of  original  entry  in  which  pur- 
chases of  merchandise  are  recorded  (§  38).  The  ruling  in  this  book  should  be 
such  that  each  purchase  may  be  recorded  on  one  horizontal  line;  this  is  usually 
the  same  as  in  Illustrations  Nos.  17  and  25.  If  a  record  is  to  be  kept  of  different 
classes  of  merchandise  purchased  or  of  the  merchandise  purchased  for  separate 
departments,  a  separate  column  may  be  provided  for  each  class  or  department. 
If  separate  accounts  are  maintained  with  Purchases  and  Freight  In,  and  prepaid 
freight  charges  are  included  in  the  invoice,  the  amount  of  the  freight  should  be 
recorded  in  a  special  column  for  "Freight  In"  or  by  a  separate  entry  in  the  gen- 
eral  journal. 

§  167.  The  Sales  Journal  is  a  book  of  original  entry  in  which  sales  of  mer- 
chandise are  recorded  (§  40).  If  desired,  the  carbon  copy  of  each  sales  invoice 
may  be  filed  in  a  binder  as  one  page  in  the  sales  journal;  when  this  plan  is  fol- 
lowed, no  ruled  sales  journal  (Illustration  No.  20)  is  necessary.  Each  customer's 
account  in  the  accounts  receivable  ledger  is  debited  with  the  amount  of  his  pur- 
chase as  shown  by  the  carbon  copy  of  the  sales  invoice  rendered;  at  the  end  of 
the  month  the  total  of  all  the  sales  invoices  is  posted  to  the  debit  of  the  Accounts 
Receivable  account  and  to  the  credit  of  the  Sales  account  in  the  general  ledger. 

Each  sales  invoice  should  be  numbered  consecutively,  the  carbon  copy  having  the  same  number 
as  the  sales  invoice.  The  carbon  copies  should  be  filed  in  a  binder  in  numerical  order.  Failure  to  re- 
cord a  sales  invoice  will  not  affect  the  Trial  Balance,  hence  will  not  be  detected  unless  the  customer 
files  complaint.  If  each  sales  invoice  is  numbered  consecutively  and  copies  are  filed  in  a  binder  in 
regular  order,  omissions  can  be  detected  easily. 

§  168.  The  Cash  Book.  As  explained  in  §  43,  cash  received  may  be  recorded 
in  a  cash  receipts  journal  and  cash  paid  in  a  cash  payments  journal,  or  cash  receipts 
and  payments  may  be  recorded  on  opposite  pages  of  one  cash  book,  receipts  on  the 
left  and  payments  on  the  right.  All  amounts  received  may  be  entered  in  one  column 
on  the  receipts  side  of  the  cash  book  and  all  amounts  paid  in  one  column  on  the 
payments  side  as  in  Illustrations  Nos.  22  and  23,  or  the  transactions  may  be  classified 
by  the  use  of  separate  columns.  This  classification  is  especially  desirable  when 
controlling  accounts  are  maintained  with  accounts  receivable  and  with  accounts 
payable.    The  reason  for  this  is  that  the  Accounts  Receivable  account  in  the  general 

^  177 


178 


CASH  BOOK 


ledger  is  credited  with  the  total  of  the  amounts  credited  to  the  accounts  in  the  ac- 
counts receivable  ledger,  and  the  Accounts  Payable  account  in  the  general  ledger 
is  debited  with  the  total  of  the  amounts  debited  to  the  accounts  in  the  accounts 
payable  ledger.  If  all  the  amounts  affecting  the  controlling  accounts  are  entered 
in  special  columns,  the  total  of  all  the  amounts  in  each  special  column  can  be  posted 
at  the  end  of  the  month. 

Other  special  columns  may  be  provided  for  recording  transactions  affecting 
cash  sales,  cash  purchases,  administrative  expense,  selling  expense,  etc.  If  the 
cash  sales  for  each  of  the  twenty-six  business  days  in  the  month  are  recorded  in 
one  amount,  twenty-six  postings  to  the  Sales  account  would  be  required;  but  if 
the  cash  sales  for  each  day  are  recorded, in  a  special  column,  the  total  of  this 
column  can  be  posted  in  one  amount  at  the  end  of  the  month. 


£='Oie-C<£<7!»z.,^*-7r  • 


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^^^2-<i-a<!,(i.Zi/' 


Date 


LI 


y^ame  of  Account 


ExplanatLon 


Accts  Uec. 
Cr. 


Sal(?s 
Cr. 


General 
Cr 


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7  '^ 

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S^  C   o 

cj-      r  c  o\X  -^ 

\  ^..?  0  ^  r  J  _. 

Illustration  No.  71,  Receipts  Side  of  Cash  Book  with  Special  Columns. 

EXPLANATION.  The  amount  of  cash  received  from  a  customer  on  account  or  in  full  of 
account  is  entered  in  the  first  column,  cash  received  in  payment  for  cash  sales  in  the  second  column, 
and  all  other  amounts  of  cash  received  in  the  third  column.  Each  amount  entered  in  the  first  column 
is  posted  to  the  credit  of  the  account  in  the  accounts  receivable  ledger  written  on  the  same  line  with 
it;  the  total  of  this  column  is  posted  to  the  credit  of  the  Accounts  Receivable  account  in  the  general 
ledger  at  the  end  of  the  month.  Each  amount  entered  in  the  second  column  is  not  posted,  but  the 
total  of  the  column  is  posted  to  the  credit  of  the  Sales  account  at  the  end  of  the  month.  Each  amount 
entered  in  the  third  column  is  posted  to  the  credit  of  the  account  in  the  general  ledger  written  on  the 
same  line  with  it;  the  totals  of  the  first  and  second  columns  are  extended  into  the  third  column  as  in 
the  illustration,  and  the  total  of  the  three  columns  (less  the  balance  at  the  beginning  of  the  month) 
is  posted  to  the  debit  of  the  Cash  account  in  the  general  ledger  at  the  end  of  the  month. 

*The  break  indicates  a  number  of  entries  omitted. 


CASH  BOOK 


179 


Illustration  No.  71  shows  the  receipts  side  of  the  cash  book  with  three  money 
columns,  and  Illustration  No.  72  shows  the  payments  side  of  the  cash  book  with 
the  same  number  of  money  columns;  the  use  of  each  column  is  explained  by  the 
printed  heading  and  the  explanation  of  the  illustration. 

^  I.  To  Prove  Cash.  At  the  time  it  is  desired  to  prove  cash,  each  of  the 
three  columns  on  the  receipts  and  payments  sides  of  the  cash  book  is  footed  in 
small  pencil  figures  as  in  Illustrations  Nos.  71  and  72.  The  total  of  the  first  and 
third  columns  on  the  payments  side  deducted  from  the  total  of  the  three  columns 
on  the  receipts  side  should  be  the  same  as  the  cash  in  the  bank  plus  that  on  hand 
if  it  is  not  all  deposited.  In  practice  it  is  customary  to  prove  cash  before  depositing 
the  checks  and  currency  in  the  bank. 


<57CZ<Z-CiS-i»»z,-<£tf^  / 


^y^c^i-^-^>-'?t..£^^rzS^^^ 


Date 

L.r 

/Jame  of  Accouivt/ 

Explanatiorb 

Accounts  Payaoie    Dr>. 

Gerter 

'al 

yNet  Amii. 

Pur.  Dis-.  Qx? 

Dr. 

/ 
> 

J- 

- 

•-^           /aa."'          sf,^a 

^  ^3 

7 

/  3  S' 
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s-  f 

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3  C    0   0 

^    7 

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/ 

re? . 

Illustration  No.  72,  Payments  Side  of  Cash  Book  with  Special  Columns. 

EXPLANATION.  The  amount  of  cash  paid  a  creditor  on  account  or  in  full  of  account  is 
entered  in  the  first  column,  discount  deducted  for  payment  of  purchases  invoices  within  the  discount 
period  is  entered  in  the  second  column,  and  all  other  amounts  of  cash  paid  in  the  third  column. 
Each  amount  entered  in  the  first  and  second  columns  is  posted  to  the  debit  of  the  account  in  the 
accounts  payable  ledger  written  on  the  same  line  with  it;  the  total  of  the  first  column  is  posted  to 
the  debit  of  the  Accounts  Payable  account,  and  the  total  of  the  second  column  is  posted  to  the  credit 
of  the  Purchases  Discount  account  and  to  the  debit  of  the  Accounts  Payable  account  in  the  general 
ledger  at  the  end  of  the  month.  Each  amount  entered  in  the  third  column  is  posted  to  the  debit  of 
the  account  in  the  general  ledger  written  on  the  same  line  with  it;  the  total  of  the  first  column  is 
extended  into  the  third  column  as  in  the  illustration,  and  the  total  of  these  two  columns  is  posted 
to  the  credit  of  the  Cash  account  in  the  general  ledger  at  the  end  of  the  month. 

*The  breaks  indicate  a  number  of  entries  omitted. 


i8o 


GENERAL  JOURNAL 


§  169.  General  JournaL  When  controlling  accounts  are  maintained  with 
accounts  receivable  and  accounts  payable,  four  columns  are  usually  provided  in 
the  general  journal  as  in  the  illustration  below. 


c><:iSi2^i!,^<;>^>z.-f^--,e<7^ 


■^,  /f 


Accts  Pay 
Dr. 


Di? 


U. 


yName  o\!  Accounts    aiLd^ 
IxplanatioiL 


LI 


general 
Cr. 


/a  /  /  -^ 


\ja--. 


/    ^>  /    /  J~ 


n 

^  / 

^-^ -^ 

3  a  o 

Gx-/r/^  -nc^^a  ^£-tz^  ^zt-<f-^^iy  ^^^xZt&tr/ 

yS  o   a 

9  7 

^  £1   a 
7  4  f 

7-^ 

/  3.    r    J 

7   ^  f 
aU^^ 

3-  »-' 

9  7  O  > 

?7 

yj  7  <>   I)- 

^7- 

/ 

Illustration  No.  73,  General  Journal  with  Two  Special  Columns. 

EXPLANATION.  The  two  debit  columns  are  ruled  at  the  left  and  the  two  credit  columns 
at  the  right  to  avoid  errors  in  posting.  The  total  of  the  two  columns  at  the  left  should  at  all  times 
equal  the  total  of  the  two  columns  at  the  right.  At  the  conclusion  of  each  page  these  totals  should 
be  proved  and  forwarded;  this  proof  should  also  be  made  before  posting  the  totals  of  the  'Ac- 
counts Payable,  Dr."  and  'Accounts  Receivable,  Cr."  columns  at  the  end  of  the  month. 

*The  break  indicates  a  number  of  entries  omitted. 


LEDGER  i8i 

The  amount  in  each  transaction  which  affects  the  debit  side  of  an  account  in 
the  accounts  payable  ledger  is  entered  in  the  "Accounts  Payable,  Dr."  column; 
the  amount  in  each  transaction  which  affects  the  credit  side  of  an  account  in  the 
accounts  receivable  ledger  is  entered  in  the  "Accounts  Receivable,  Cr."  column. 
This  permits  the  posting  of  each  amount  to  the  proper  account  in  the  accounts 
payable  or  accounts  receivable  ledger  at  the  time  of  entry,  and  the  posting  of  the 
total  of  the  special  debit  column  to  the  Accounts  Payable  account  and  the  total 
of  the  special  credit  column  to  the  Accounts  Receivable  account  at  the  end  of  the 
month.     Illustration  No.  73  shows  one  form  of  a  special  column  journal. 

§  170.  The  Ledger.  As  explained  in  §  14,  the  ledger  contains  all  the  ac- 
counts necessary  to  show  the  complete  record  of  the  transactions  performed.  The 
accounts  in  the  ledger  should  be  arranged  in  the  same  order  as  they  will  appear  on 
the  Balance  Sheet  and  Statement  of  Profit  and  Loss.  The  reason  for  this  is  that 
these  reports  are  prepared  from  the  Trial  Balance,  and  the  Trial  Balance  is  made 
from  the  ledger.  Illustration  No.  88  shows  a  Trial  Balance  with  the  correct  ar- 
rangement  of   the   accounts. 

When  controlling  accounts  are  maintained  with  accounts  receivable  and  accounts  payable, 
the  individual  accounts  with  customers  and  creditors  should  be  kept  in  a  separate  division  of  the 
ledger  or  in  separate  ledgers;  this  will  depend  on  the  number  of  creditors  from  whom  the  business 
buys  on  account  and  the  number  of  customers  to  whom  the  business  sells  on  account. 

§  171.  An  Auxiliary  Book  is  one  which  provides  detailed  information  in 
regard  to  the  transactions  recorded  in  the  books  of  original  entry.  Its  purpose  is 
to  simplify  the  explanation  in  the  books  of  original  entry  and  to  provide  information 
which  would  not  be  available  even  though  the  explanation  might  be  given  in  detail. 
The  notes  receivable  book,  notes  payable  book,  bank  check  book,  and  insurance 
policy  record  are  the  auxiliary  books  discussed  and  illustrated  in  this  chapter; 
additional  auxiliary  books  will  be  explained   in  subsequent  chapters. 

§  172.  The  Notes  Receivable  Book  is  an  auxiliary  book  which  contains 
detailed  information  in  regard  to  notes  and  acceptances  receivable.  The  ruling 
should  provide  columns  for  (a)  the  date,  (b)  the  number,  (c)  the  drawer  or  en- 
dorser, (d)  the  maker  or  drawee,  (e)  the  payee,  (f)  where  payable,  (g)  the  date  of 
paper,  time,  and  due  date,  (h)  the  amount,  (i)  the  rate  of  interest,  (j)  when  paid, 
and  (k)  remarks.  This  arrangement  permits  full  information  in  regard  to  a  note 
or  draft  to  be  written  on  one  horizontal  line.  Illustration  No.  74  shows  a  popular 
form  of  ruling  for  the  notes  receivable  book. 

§  173.  The  Notes  Payable  Book  is  an  auxiliary  book  which  contains  de- 
tailed information  relative  to  notes  signed  and  drafts  accepted  by  the  business. 
The  ruling  should  provide  columns  for  (a)  the  date,  (b)  the  number,  (c)  the  drawer 
or  endorser,  (d)  the  maker  or  drawee,  (e)  the  payee,  (f)  where  payable,  (g)  the  date 
of  paper,  time,  and  due  date,  (h)  the  amount,  (i)  the  rate  of  interest,  (j)  when  paid, 
and  (k)  remarks.  This  arrangement  permits  full  information  in  regard  to  a  note  or 
draft  to  be  written  on  one  horizontal  line.  Illustration  No.  75  shows  a  popular 
form   of  ruling  for   the  notes   payable  book. 

If  desired,  the  notes  receivable  and  payable  books  may  be  used  as  posting  mediums,  in  which 
case  one  is  referred  to  as  the  notes  receivable  journal  and  the  other  as  the  notes  payable  journal; 
these  are  explained  and  illustrated  in  a  succeeding  chapter. 

§  174.  Insurance  Policy  Record.  The  purpose  of  this  book  is  to  provide 
a  record  of  each  insurance  policy.  The  information  in  it  should  show  (a)  the 
date  of  the  policy,  (b)  number,  (c)  name  of  the  insurance  company,  (d)  kind  of 
property  insured,  (e)  amount  of  the  policy,  (f)  date  of  expiration,  and  (g)  the 
premium   paid   for  the   policy.     Additional   columns  should   be   provided   for  the 

{Continued  on  page  182). 


1 82 


AUXILIARY  BOOKS 


NOTES    RECEIVABLE 

i 

Oiir 

MakCT  or  Drawn 

Roclvol 

No. 

(DraftJ          (Note] 

(Note)        (Drall) 

(PayeeJ 

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sMa-^ //a^CC  AP,!!^?'!.-^ 

Illustration  No.  74,  Left  Page  of  Notes  Receivable  Book. 

EXPLANATION.  Each  note  receivable  or  acceptance  receivable  is  recorded  on  one  line  at 
the  time  it  is  received;  the  number  given  this  may  be  used  as  the  explanation  of  the  entries  in  the 
general  journal  and  cash  book. 

NOTES    PAYABLE 


In  WTiose  Favor 


M^ 


/O 
/ 

/O 
/^ 

/o 


f3^4^^.^.W.  (^ 


y^J!'i'Tr>^,et^yi.tyy?,!tJ^/^2a^n^ 


Illustration  No.  75,  Left  Page  of  Notes  Payable  Book. 


EXPLANATION.  Each  note  signed  by  the  business  and  each  draft  accepted  by  it  is  recorded 
in  this  book  at  the  time  of  issue  or  acceptance;  the  number  given  each  may  be  used  as  the  explana- 
tion of  the  entries  in  the  genera!  journal  and  cash  book. 


INJ'UDANCE  Policy  I^ecoisd. 


Dateof  Policy  |      A^ 


i^ame  of  Compaip^ 


"Propeiiylni'urcd 


Amount    j    Expiree    Preiniiffli 


6  f  /  s-j 
/  a  o  / 

/ ^  /  3S- 

<^  3   /    /  '       I 


/^t:^i^<U^n'^^.,o^iiJ- 


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y  £>  0  a 
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JyC 


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Illustration  No.  76,  Left  Page  of  Insurance  Policy  Record. 


EXPLANATION.  The  book  is  ruled  so  that  all  the  information  desired  in  connection  with 
each  policy  may  be  recorded  on  one  horizontal  line.  A  description  of  the  policy  is  written  on  the 
left-hand  page,  and  the  monthly  value  of  the  premium  which  expires  is  shown  in  the  columns  on 
the  right-hand  page.  Premiums  on  policies  which  do  not  expire  during  the  year  in  which  the  policies 
are  issued,  are  distributed  in  the  next  year. 

amount  which  expires  during  each  month;  with  this  information  the  bookkeeper 
can  easily  determine  the  value  of  the  expired  and  unexpired  insurance  at  the  close 
of  the  fiscal  period.    The  insurance  which  has  expired  during  the  year  is  debited  to 


AUXILIARY  BOOKS 


183 


NOTES 

RECEIVABLE 

~ 

Dale  of  P>p« 

Tlmt 

When  Due 

Anuutt 

K2--! 

W^Paid 

Roaib 

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Illustration  No.  74,  Right  Page  of  Notes  Receivable  Book. 
EXPLANATION.     The  total  of  the  unpaid  notes  and  acceptances  should  always  equal  the 
balance  of  the  Notes  Receivable  account  in  the  general  ledger,  also  the  total  of  the  notes  and  accept- 
ances in  the  safe  and  in  the  hands  of  agents  for  collection. 


NOTES  PAYABLE 


Qite  ol  Paper 

Time 

When  Due 

Rate  of 
Interest 

iMT   1  iMiMni 

I-     'ffi  '(S 

iC 

57 

(M 

s? 

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%'• 

Sh 

<% 

!Si 

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^«y  Ja 

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00 

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Cj/ 

V 

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/f>      V/fnr-,    /o      fo       „        /ff 

f 

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/■*" 

if 

ir> 

/fl' 

^^ 

/o 

f           - 

/f> 

/o 

iat 

cy. 

Illustration  No.  75,  Right  Page  of  Notes  Payable  Book. 
EXPLANATION.     When  a  note  or  draft  is  paid,  the  date  should  be  entered  in  the  "When 
Paid"  column.    The  total  of  the  unpaid  notes  and  drafts  should  at  all  times  equal  the  balance  of 
the  Notes  Pavable  account  in  the  general  ledger.    A  proof  of  this  should  be  prepared  monthly. 


IN^UDANCE  Policy  I^ecord. 

Monthly  lExpiraiiorur ' 


Jan.      Tab. 


March   i^il    Maj^  1  Jurvoi  July     Auy. 


.Jfept. 


Oct. 


/fov      Dec. 


Amount        IT 
CaTried  Fbrvratrd 


^^o     XMo      ^.'^^      ^"^^      -^^^ 


A^r 


^/ir      Mr       ^^       .^f 
s:r3   cr.?3    ^rj 


/.>o      /.>o    /.y-ff 
/.>ty     />(?    /■>o 

/.ro 


>^c  >,'/o  "y./^o,  >.t/^(/  >.u<' 

^y  ye  yr  vi'  ^^ 

^r^  ^fj  ^.fs  ^^''.^  ^r^^ 

/.7-0  /,>o  /.>o  />(>  /.y-o 

/7-0  /,>0  /.>^  />-^  /.?-0 

/ /"  ^  /.ro  /j-o  /.("o  /.Fo 

^eo  K^.oo^  3.00  k3.oo  ^,00 


/o  ra\ 

/fOff 


Illustration  No.  76,  Right  Page  of  Insurance  Policy  Record. 
The  distribution  by  months  is  shown  only  for  the  current  year,  the  amount  of  unexpired 
premium  being  entered  in  the  last  column  at  the  right.  At  the  beginning  of  the  next  year,  this 
unexpired  premium  will  be  distributed  in  the  columns  representing  the  months  to  which  it  is 
applicable.  It  is  necessary  to  show  the  nature  of  the  property  insured  because  this  determines  the 
operating  account  affected;  thus,  expired  insurance  on  delivery  equipment  and  merchandise  is 
debited  to  Selling  Expense,  expired  insurance  on  office  equipment  to  Administrative  Expense,  etc. 

the  proper  operating  accounts  at  the  close  of  the  year,  at  which  time  the  book- 
keeper should  transfer  the  unexpired  insurance  to  a  new  page  in  the  insurance 
policy  record.    Illustration  No.  76  shows  a  popular  form  of  the  insurance  policy  record. 


1 84 


EXERCISE 


§  175.  The  Bank  Check  Book  contains  blank  checks  to  be  used  by  the 
depositor  for  withdrawing  funds  deposited  in  the  bank.  The  check  book  provided 
by  the  bank  may  contain  one,  two,  or  three  blank  checks  to  the  page.  Illustration 
No.  58  shows  a  check  book  with  two  checks  to  the  page  and  with  the  bank  account 
kept  on  the  front  of  the  check  stub.  The  record  on  the  front  of  the  check  stub  is 
reconciled  with  the  monthly  bank  statement  as  explained  in  §  80. 

Exercise  No.  71,  Retail  Furniture  Business 

The  Trial  Balance  given  below  was  taken  from  the  books  of  Gobel  &  Mitchell, 
partners  engaged  in  a  retail  furniture  business.  It  shows  the  results  of  the  opera- 
tions of  the  business  from  January  i  to  November  30. 

Gobel  &  Mitchell,  Trial  Balance,  November  30,  1922. 


Cash   (4) 

Notes  Receivable  (7) 

Accounts  Receivable  (4) 

Reserve  for  Doubtful  Accounts  (4) 

Ofhce  Equipment  (5) 

Reserve  for  Depreciation  of  Ofhce  Equip.   (4) 

Delivery  Equipment  (4) 

Reserve  for  Depreciation  of  Del.  Equip.  (4). 

Building  (4) 

Land  (4) 

Office  Supplies  (5) 

Insurance  (4) 

Notes  Payable  (6) 

Accounts  Payable  (10) 

J.  R.  Gobel,  Capital  (6) 

J.  R.  Gobel,  Personal  (7) 

W.  H.  Mitchell,  Capital  (6) 

W.  H.  Mitchell,  Personal  (7) 

Sales  (8) 

Sales  Returns  (5) 

Sales  Allowances  (5) 

192 1   Inventory  (4) 

Purchases  (7) 

Freight  In   (6) 

Purchases  Returns  and  Allowances  (6) 

Selling  Expense  (15) 

Administrative  Expense  (12) 

Interest  Earned  (6) 

Purchases  Discount  (5) 

Commission  (5) 

Interest  Cost  (6) .- ' 

Sales  Discount  (6) 


Notes  Receivable: 

Note  signed  by  M.  B.  Wallace,  dated  July  12,  due  in  six  months,  with 

interest  at  6%  from  date $600 .  00 

Note  signed  by  J.  H.  Weber,  dated  October  15,  due  in  sixty  days,  with 

interest  at  6%  from  date 201 .  50 


$4,696.91 

801.50 

4,118.76 

79-31 

$  101.76 

650 . 00 

30.00 

4,000.00 

350.00 

3,500.00 

2,500.00 

329.12 

401 .60 

2,000.00 

3.021. 51 

15.376.50 

20.00 

15.376.50 

30.00 

37,431-44 

107.00 

51.89 

18,522.45 

28,187.65 

2,107.56 

211.08 

2,680.40 

1,819.78 

42.19 

576.50 

118.50 

51.20 

40.85 

$74,665.98 

$74,665.98 

EXERCISE 


185 


406  Lincoln  Ave.,  City 

Oct. 

15, 

60  days 

$  311-50 

530  Craig  St.,  City 

Nov. 

5. 

30  days 

101.75 

City 

Nov. 

I, 

account 

412.41 

Clifton 

Nov. 

15, 

account 

60.05 

702  Pike  St.,  City 

Nov. 

I, 

30  days 

101.15 

609  Market  St.,  City 

Nov. 

10, 

30  days 

619.00 

427  Elm  St.,  City 

Nov. 

15. 

account 

441.60 

13  W.  7th  St.,  City 

Nov. 

20, 

account 

118.70 

217  Delta  Ave.,  City 

Oct. 

12, 

30  days 

217.60 

Elm  wood 

Oct. 

16, 

60  days 

300 . 00 

Reading 

Oct. 

2, 

60  days 

260.00 

2527  Erie  Ave,.  City 

Nov. 

20, 

30  days 

1,160.00 

15  Burnet  Ave.,  City 

Oct. 

I, 

30  days 

15.00 

Accounts  Receivable: 
O.  H.  Roth  (4) 
J.  H.  Weber  (5) 
West  Side  Furn.  Exch.  (4) 
Schott  Decorating  Co.  (4) 
C.  E.  Perry  &  Co.  (4) 
S.  A.  Burkhart  (4) 
Just  Rite  Furn.  Co.  (4) 
J.  N.  Hook  &  Co.  (4) 
W.  A.  Newman  (4) 
R.  R.  Phillips  (4) 

E.  E.  Frank  (4) 
W.  D.  Wolfe  (4) 

F.  X.  Vance  (4) 

Insurance  Premiums  Paid: 

On  merchandise,  $205.15;    on  delivery  equipment,  $106.16;    on  building,  $90.29; 
total,  $401.60. 

Notes  Payable: 

Note  in  favor  of  Merchants  National  Bank,  dated  October  10,  due  in 

sixty  days,  with  interest  at  6%  from  date $2,000.00 

Accounts  Payable: 
C.  H.  Campbell  Furn.  Co.  (6) 
Hasselbarth-Wheton  Co.  (4) 
The  Robt.  Mitchell  Furn.  Co. 
The  Brookville  Furn.  Co.  (4) 
De  Luxe  Upholstery  Co.  (4) 
Kearns  Furniture  Co.  (5) 


(4) 


Shelbyville 
Utica 
Cincinnati 
Brookville 
Grand  Rapids 


Nov.  15, 
Nov.  12, 
Oct.  25, 
Nov.  5, 
Oct.    12,  60  days 


2/30,  n/60 
2/30,  n/60 
60  days 
2/30,  n/60 


High  Point  Nov.  30,  2/15,  n/30 


$  601.05 
201 .70 
475  00 
350.00 
800 . 00 
593 • 76 


On  ledger  paper  open  an  account  with  each  account  shown  on  the  Trial  Bal- 
ance, allowing  for  each  the  number  of  lines  indicated  by  the  number  in  parenthesis 
after  the  name  of  the  account.  In  the  explanation  column  of  the  Notes  Receivable, 
Notes  Payable,  and  Insurance  accounts  write  the  special  information  in  regard 
to  the  notes  and  insurance;  the  two  notes  due  the  business  should  be  entered  as 
separate  amounts  in  the  Notes  Receiv^able  account.  Since  there  is  a  controlling 
account  in  the  general  ledger  for  accounts  receivable  and  another  for  accounts 
payable,  the  individual  accounts  with  customers  and  creditors  will  be  opened  on 
ledger  sheets  separate  from  the  ones  used  for  general  ledger  accounts. 

The  transactions  for  December  are  to  be  recorded  in  the  purchases  journal, 
sales  journal,  cash  book,  and  general  journal.  Loose  sheets  of  paper  will  be  used, 
ruled  similar  to  Illustrations  Nos.  25,  26,  71,  72  and  73.  The  cash  balance  shown 
on  the  Trial  Balance  should  be  entered  in  the  "General"  column  on  the  receipts 
side  of  the  cash  book  before  any  transactions  are  recorded. 

December . 

1.  Gave  the  Werk  Realty  Co.  a  check  for  $100.00  in  payment  for  rent  of  ware- 

house for  December,  and  N.  R.  Hayes  Garage  a  check  for  $38.50  in  pay- 
ment for  November  garage  rent  and  repairs  on  delivery  truck. 

Debit  Selling  Expense  for  both  payments. 

Bought  from  the  C.  H.  Campbell  Furniture  Co.,  Shelbyville,  terms  2/20, 
n/60,  furniture  per  purchases  invoice  No.  156,  $320.00. 

Received  a  check  from  the  Schott  Decorating  Co.  in  full  of  account. 

2.  Sold  J.  H.  Weber,  530  Craig  St.,  City,  terms  30  days,  i  davenport,  per  sales 

invoice  No.  851,  $78.50. 
Gave  the  C.  J.  Krehbiel  Co.  a  check  for  $33.75  in  payment  for  2,000  circulars 


i86  EXERCISE 

Received  $35.75  for  cash  sales. 

3.  Received  from  C.  E.  Perry  &  Co.  their  note  dated  December  i,  due  in  thirty 

days,  with  interest  at  6%  from  date,  in  full  of  account. 
Sold  C.  A.  Anderson,  Linwood,  terms  60  days,  i  dining  room  suite  per  sales 

invoice  No.  852,  $525.00. 
Received  $72.50  for  cash  sales. 

4.  Gave  the  Brookville  Furniture  Co.  a  check  in  full  of  account,  less  discount. 
Sold  J.  N.  Hook  &  Co.,  13  W.  17th  St.,  City,  terms  account,  i  library  table 

per  sales  invoice  No.  853,  $45.00. 

5.  Withdrew  $70.00  from  the  bank  and  paid  the  following:   stamps,  for  letters, 

$10.00;   J.  R.  Gobel  and  W.  H.,  Mitchell,  each  $30.00  for  personal  use. 
Debit  Office  Supplies  for  the  stamps  purchased. 
Returned  to  the  Kearn  Furniture  Co.  i  chair,  cost  price,  $8.00. 

6.  Received  a  check  from  J.  H.  Weber  in  payment  for  invoice  dated  Nov,  5. 
Sold  R.  O.  Burns,  Richmond,  terms  30  days,   i   kitchen  cabinet  per  sales 

invoice  No.  854,  $85.00. 
Withdrew  $200.00  from  the  bank  to  pay  the  weekly  pay  roll  as  follows: 
office  employees,  $50.00;    employees  in  selling  department,  $150.00. 

8.  Bought  from   the   Brookville  Furniture   Co.,   Brookville,   terms  2/30,   n/60, 

furniture  per  purchases  invoice  No.  157,  $675.00. 
Received  $90.75  for  cash  sales. 

9.  The  note  due  at  the  bank  today  and  interest  on  the  same  was  paid  as  follows: 

note  for  $1,000.00  dated  today,  due  in  sixty  days,  and  check  for  $1,030.00, 
balance  due  on  the  old  note  and  interest  on  the  new  note  at  6%. 

Received  $100.00  from  West  Side  Furniture  Exchange  to  apply  on  account. 

Transferred  from  stock  to  the  office,  i  table  (cost,  $28.00)  and  3  chairs  (cost, 
$4.00  each). 

10.  Sold  C.  E.  Herzog,  2034  Eastern  Ave.,  City,  terms  account,  6  dining  room 

chairs  per  sales  invoice  No.  855,  $40.00;    Just  Rite  Furniture  Co.,  City, 
terms  account,  3  wardrobes  per  sales  invoice  No.  856,  $180.00. 
Bought  from  the  Imperial  Furniture  Co.,  Grand  Rapids,  terms  2/15,  n/30, 
furniture  per  purchases  invoice  No.  158,  $520.00. 

11.  Received  a  check  from  O.  H.  Roth  in  full  of  account  less  1%  discount  per 

special  agreement. 
Make  the  entry  for  the  sales  discount  in  the  general  journal. 
Gave  the  Hasselbarth-Wheton  Co.  a  check  in  full  of  account,  less  discount. 

12.  Sold  S.  A.  Burkhart,  609  Market  St.,  City,  terms  30  days,  i  tea  wagon  per 

sales  invoice  No.  857,  $18.00;    C.  tj.  Newton,  102  Front  St.,  City,  terms 
account,  i  upholstered  rocker  per  sales  invoice  No.  858,  $28.00. 
Received  $68.00  for  cash  sales. 

13.  Purchased  an  Underwood  typewriter  for  $100.00.     Gave  in  payment  the  old 

typewriter  (cost  $80.00,  book  value  $60.00)  and  our  check  for  $50.00. 

Sold  R.  R.  Phillips,  Elmwood,  terms  60  days,  i  oak  buffet  per  sales  invoice 
No.  859,  $39.00;  H.  C.  Kern,  253  Earnshaw  Ave.,  City,  terms  account, 
I  5-piece  living  room  suite  per  sales  invoice  No.  860,  $1,015.00. 

Withdrew  $200.00  from  the  bank  to  pay  the  weekly  pay  roll. 

Gave  the  Kearns  Furniture  Co.  a  check  in  full  of  account,  less  credit    for 
chair  returned  and  less  discount. 
15.     Bought   from    the    Connersville    Furniture    Co.,    Connersville,    terms     1/15, 
n/30,  furniture  per  purchases  invoice  No.  159,  $505.00. 

Paid  freight  on  furniture  purchased,  $128.76. 

Bought  from  the  Pounsford  Stationery  Co.,  City,  terms  account,  miscel- 
laneous office  supplies,  $28.75. 

Enter  in  the  general  journal  as  this  is  not  a  purchase  of  merchandise. 

Received  a  check  from  J.  H.  Weber  in  payment  for  note  and  interest,  due  on 
the  14th. 


EXERCISE  187 

Gave  the  C.  H.  Campbell   Furniture  Co.  a  check  in  payment  for  invoice 

dated  November  15,  less  discount. 
Prove  cash  (balance,  $2,182.86). 

16.  Sold  L.  A.  Sanderson,  Louisville,  terms  net  30  days,  i  dining  room  suite  per 

sales  invoice  No.  861,  $475.00. 
H.  C.  Kern  claimed  that  the  armchair  belonging  to  the  living  room  suite  sold 

him  on  the  13th  was  not  up  to  standard.     We  allowed  him  a  credit  for 

$20.00,  and  put  in  a  claim  for  this  amount  against  the  De  Luxe  Upholstery 

Co.  from  whom  this  furniture  was  purchased. 
Only  one  entry  is  required  at  this  time. 
Received  a  check  from  the  West  Side  Furniture  Co.  for  balance  due  on  invoice 

dated  November  i. 

17.  Our  attorney  reported  that  the  amount  due  from  F.  X.  Vance  is  uncollectible. 
Gave  each  partner  $40.00  for  personal  use. 

Received  $187.65  for  cash  sales. 

18.  Received  a  credit  bill  from  the  De  Luxe  Upholstery  Co.  for  $20.00,  amount 

of  claim  which  we  filed  on  the  i6th. 
Gave  C.  H.  Campbell  Furniture  Co.  check  in  full  of  account,  less  discount. 
E.  E.  Frank  accepted  our  lo-day  draft  in  full  of  account. 

19.  Gave  the  De  Luxe  Upholstery  Co.  our  note  dated  today,  due  in  thirty  days, 

with  interest  at  6%  from  date,  in  full  of  account. 
Sold  J.  H.  Weber,  530  Craig  St.,  City,  terms  30  days,  i  chifforobe,  $70.00, 
and  I  dressing  table,  $60.00,  per  sales  invoice  No.  862.  ■ 

20.  Received  $101.60  for  cash  sales. 

Withdrew  $200.00  from  the  bank  to  pay  the  weekly  pay  roll. 

Received  a  check  from  S.  A.  Burkhart  in  full  for  invoice  dated  November  10. 

22.  Gave  the  Daily  Tribune  a  check  for  $50.00  in  payment  for  advertisement. 
Bought  from  Kreimer  Bros.  &  Co.,  Cincinnati,  terms  30  days,  furniture  per 

purchases  invoice  No.  160,  $819.75. 
Sold  E.  E.  Frank,  Reading,  terms  60  days,  i  armchair  per  sales  invoice  No, 
863,  $26.00. 

23.  J.  H.  Weber  returned  the  dressing  table  sold  him  on  the  19th,     Gave   him 

credit  for  the  selling  price. 
Received  a  check  for  $50.00  from  the  Delco-Light  Co.,  local  distributors  of 

the   "Frigidaire,"   in   payment  for   commission   on   sales   of   these   iceless 

refrigerators.     These  are  not  carried  in  stock,  but  commission  is  allowed 

on  refrigerators  sold. 
Gave  the  Imperial  Furniture  Co.  a  check  in  full  of  account,  less  discount. 
W.  H.  Mitchell  sent  to  his  home  i  library  table  and  i  rocker.     Charge  his 

Personal  account  with  the  cost  price,  $52.00. 
Received  $160.80  for  cash  sales. 

24.  Accepted  a  ten-day  draft  drawn  on  us  by  the  Robt.  Mitchell  Furniture  Co. 

in  full  of  invoice  dated  October  25. 
Received  checks  as  follows:    J.   H.  Weber,   in  payment  for  invoice  dated 
December  2;  C.  E.  Herzog,  in  full  of  account;  H.  C.  Kern,  in  full  of  account 
less  1%  discount  per  special  agreement. 

26.  Received  $68.00  for  cash  sales. 

Paid  $1.00  for  telegram.    Debit  Administrative  Expense. 

27.  Sold  R.  O.  Burns,  Richmond,  terms  30  days  net,  i  serving  table  per  sales 

invoice  No.  864,  $16.00. 
Received  $8.01  from  the  C.  &  O.  Ry.,  rebate  on  freight  paid  on  the  15th. 
Withdrew  $418.00  from  the  bank  to  pay  the  following:    pay  roll,  $200.00; 

W.  H.  Mitchell,  $108.00,  and  J.  R.  Gobel,  $110.00,  for  personal  use. 


i88  QUESTIONS 

29.  Received  check  from  E.  E.  Frank  in  payment  for  draft  accepted  on  the  i8th. 
Received  $75.60  for  cash  sales. 

Sold  O.  H.  Roth,  406  Lincoln  Ave.,  City,  terms  net  60  days,  i  chiffonier  per 
sales  invoice  No.  865,  $43.00. 

30.  Bought   from   Hasselbarth-Wheton   Co.,   Utica,    terms   2/30,  n/6o,  furniture 

per  purchases  invoice  No.  161,  $451.70. 
Gave  the  Connersville  Furniture  Co.  a  check  in  full  of  account,  less  discount. 
Received  a  check  from  the  Just  Rite  Furniture  Co.  in  full  of  account. 

31.  Received  from  R.  R.  Phillips  his  30-day  note  dated  December  14,  with  interest 

at  6%  from  date,  in  full  of  invoice  dated  October  16. 
Paid  freight  on  furniture  purchased;  $78.76. 

Credit  each  partner's  personal  account  with  $200.00,  salary  for  the  month. 
Debit  §  155  for  J.  R.  Gobel's  salary  and  §  152  for  W.  H.  Mitchell's  salary. 
When  the  foregoing  transactions  have  been  recorded,  proceed  as  follows: 

1.  Prove  cash  (balance,  $3,600.17). 

2.  Post  from  all  books  of  original  entry,  including  the  totals  of  the  special 
columns,  and  take  a  Trial  Balance.    Allow  four  lines  for  each  new  account  opened. 

Retain  the  Trial  Balance  and  all  books  of  account  for  use  in  Exercise  No.  80. 

QUESTIONS 

1.  (a)  What  accounts  are  debited  and  credited  with  the  total  of  the  purchases 

journal  at  the  end  of  the  month  when  a  controlling  account  is  kept  with 
Accounts  Payable?  (b)  What  accounts  are  affected  if  no  controlling  ac- 
count is  kept? 

2.  (a)  What  accounts  are  debited  and  credited  with  the  total  of  the  sales  journal 

at  the  end  of  the  month  if  a  controlling  account  is  kept  with  Accounts 
Receivable?  (b)  What  accounts  are  affected  if  no  controlling  account  is 
kept? 

3.  Why  is  the  balance  of  cash  on  hand  at  the  beginning  of  the  month  deducted 

from  the  total  of  all  the  columns  on  the  receipts  side  of  the  cash  book  be- 
fore posting  the  cash   receipts  for  the  month? 

4.  (a)  If  there  are  312  business  days  during  the  year  and  cash  sales  are  recorded 

on  the  receipts  side  of  the  cash  book  each  day,  how  many  entries  will  be 
required  to  record  and  post  these  cash  sales  if  the  Trial  Balance  is  made 
monthly  and  a  special  column  is  provided  for  cash  sales  on  the  receipts  side 
of  the  cash  book?  (b)  How  many  entries  would  have  been  required,  in- 
cluding the  posting,  if  the  special  column  had  not  been  used? 
The  term  "entry"  here  refers  to  the  writing  of  the  amount  for  each  cash  sale  and  each  total, 
both  in  the  cash  book  and  the  ledger. 

5.  What  entry  will  be  required  in  the  general  journal  for  a  $500.00  note  received 

from  S.  J.  Shook  in  full  of  account  on  January  9  if  this  note  is  described  as 
No.  50  in  the  notes  receivable  book? 

6.  How  does  the  bookkeeper  prove  that  the  notes  payable  record  is  correct  as 

compared  with  the  Notes  Payable  account? 

7.  If  all  cash  received  is  deposited  in  the  bank,  what  relation  does  the  pass  book 

have  to  the  entries  on  the  receipts  side  of  the  cash  book? 

8.  How  does  the  bookkeeper  reconcile  the  bank  statement  with  his  bank  ac- 

count on  the  check  stub? 

9.  What  is  the  purpose  of  the  insurance  policy  record? 

10.     Describe  in  detail  the  method  of  proving  cash  with  a  cash  book  ruled  similar 
to  Illustrations  Nos.  71  and  72. 


Chapter  XIX 


BUSINESS  FORMS  AND  VOUCHERS 

The  Purpose  of  this  Chapter  is  to  explain  and  illustrate  business  forms  and 
vouchers  which  have  not  been  discussed  in  previous  chapters.  The  student  needs 
to  understand  the  various  business  forms  which  represent  transactions  in  business 
if  he  is  to  record  the  transactions  correctly. 

§  176.  Each  Transaction  is  represented  to  the  bookkeeper  by  a  business 
form  or  voucher,  as  explained  in  Chapter  IX.  When  the  bookkeeper  has  recorded 
the  transaction  from  the  facts  given  in  the  business  form,  it  is  filed  for  future  refer- 
ence. The  purchases  order,  invoice,  receipt,  deposit  ticket,  check,  bank  draft, 
cashier's  check,  money  order,  draft,  and  note  were  discussed  and  illustrated  in 
previous  chapters;    others  are  explained  and  illustrated  in  this  chapter. 

§  177.  A  Business  Letter  is  a  written  communication  relative  to  a  trans- 
action to  be  completed  or  confirming  the  completion  of  a  transaction.    The  subject 


C.W.  KEELJVNO 

TELEPHONE    358                                                                                                                      A.O.MUNSON 

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1      €.l0Mmlm^  k  €0. 

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m                                                               DEALERS  IN                                                          ^■^^''*'\olT'"^^^ 

^F                                                    f  J                     -^                 .               -_                   ,                          ;       /^                 1                                                *S  REPRESENTED. 

Hay,urain,Feed  and  Coal 

ClIVCIiViVATI,OHIO,     April   7,    192 

Young  &  Doyle, 
1306   Grand  Ave. , 
Cincinnati,   Ohio. 

Gentlemen: 

Replying  to  your  letter  of  this  date  asking  for 
price   on  No.    2  Hay  in  carload  lots,  will   quote  you  $15.00 
per  ton,   delivered  at  your  place   of  husiness.      We  have  a 
car  in  the  yards  and   cin  have   it   placed   on  your  siding   to- 
morrow. 

• 

Please  advise  us  at   once,   as  we  could  not  make 
this  price  unless  we  were  permitted   to  unload  the   car  at 
your  warehouse. 

Sincerely, 

C.    W.    KEELAKD  &  CO. 



S/K                                                                          per^2.^>^:'<V^::Ii^,           / 

Illustration  No.  77,  Business  Letter. 

EXPLANATION.     This  letter  is  written  on  the  letterhead  of  the  firm  and  is  a  reply  to  an 
inquiry  for  price  on  hay  in  carload  lots.      The  letter  has  been  reduced  about  one-third  in  size. 


189 


190 


BUSINESS  FORMS  AND  VOUCHERS 


matter  in  the  business  letter  should  be  explicit  and  so  arranged  that  the  reader 
may  easily  interpret  its  meaning.  If  the  nature  of  the  letter  is  such  that  the  facts 
given  therein  will  be  needed  for  the  completion  of  the  transaction  or  the  interpreta- 
tion of  the  transaction  completed,  a  copy  of  the  reply  should  be  attached  to  the 
letter  and  filed  for  convenient  reference.  The  answer  to  the  business  letter  should 
not  be  written  on  the  letter  itself  because  this  would  necessitate  its  being  returned, 
hence  the  writer  would  not  have  a  copy  of  the  letter  or  the  answer  in  his  files.  No 
special  form  of  business  letter  is  necessary,  but  the  arrangement  should  be  such 
that  the  facts  stated  in  the  letter  may  be  clearl}^  set  forth,  as  in  Illustration  No.  77. 
§  178.  A  Certified  Check  is  a  personal  check,  payment  of  w^hich  is  guar- 
anteed by  the  bank  authorized  to  pay  it;  this  guarantee  is  effected  by  the  cashier 
or  other  official  of  the  bank  writing  across  the  face  "Certified"  together  with  the 
name  and  official  title  of  the  officer  making  certification.  Without  certification 
the  holder  of  a  check  does  not  know  that  it  will  be  paid  upon  presentation;  with 
certification  the  holder  knows  that  it  will  be  paid  upon  presentation.  The  form 
of  certification  is  shown  in  Illustration  No.  78.  The  drawer  or  the  holder  of  a 
check  may  have  it  certified.  Certified  checks  are  used  as  a  bond  to  guarantee 
fulfillment  of  a  contract,  in  settlement  of  notes  payable  at  a  bank  other  than  the 
one  on  which  the  check  is  drawn,  in  payment  of  real  estate  when  purchased,  pay- 
ment of  judgment  in  courts,  and  in  other  cases  where  it  is  necessary  for  the  holder 
to  know  that  the  check  will  be  paid  upon  presentation. 


'>^_3?7 


^<r  /.9/ 


Illustration  No.  78,  Certified  Check. 

§  179.  A  Bill  of  Lading  is  the  receipt  issued  by  a  transportation  company 
for  merchandise  or  other  property  received  by  it  for  shipment.  The  Interstate 
Commerce  Commission,  which  has  supervision  of  all  railroads  in  the  United  States 
doing  an  interstate  business,  requires  three  copies  of  the  bill  of  lading  for  each 
shipment,  each  copy  to  conform  to  the  requirements  imposed  by  the  Commission. 
These  three  copies  are  described  as  "original",  "shipping  order,"  and  "memoran- 
dum." The  size  is  83^2  x  7  or  83/^  x  11.  See  Illustration  No.  79  on  pages  191,  192, 
193  and  195. 

When  a  shipment  is  to  be  made  by  freight,  the  shipper  prepares  the  three 
bills  of  lading;  by  the  use  of  carbon  paper  the  three  copies  may  be  made  at  the 
same  time.  The  three  forms  are  arranged  in  the  follow^ing  order:  (i)  original, 
(2)  shipping  order,  and  (3)  memorandum.  The  original  and  shipping  order  are 
presented  to  the  agent  of  the  transportation  company  with  the  merchandise  to  be 
shipped,  and,  when  this  is  accepted  for  shipment,  they  are  signed  by  him.  The 
agent  retains  the  shipping  order  and  the  shipper  retains  the  original.  The  original 
should  be  mailed  to  the  consignee — that  is,  the  one  to  whom  the  merchandise  was 
shipped — because  the  merchandise  in  transit  belongs  to  him  and  he  holds  the  trans- 
portation company  responsible  for  its  delivery.     If  the  merchandise  is  delivered 


BUSINESS  FORMS  AND  VOUCHERS 


191 


Uniform  DomratU  StntcSl  BUI  of  Ladlnc  Adopted  br  Carritn.   March    1&.   IflX 

Uniform  Straight  Bill  of  Lading     «"'-»"» ^-^ 

(PRESCKIBED   BY    THE   INTERSTATE   COMMERCE   COMMISSION) 

ORIGINAL—NOT  NEGOTIABLE  ^^""'''  ^o 


B..  8:  O.S..  W..  Railroad 


Company 


Received,  subject  to  the  classificsticns  and  tariffs  in  effect  on  the  date  o£  the  issue  of  this  Bill  of  Ladinc, 

at .Cl.G.Qlnnat.i..,,....Ohlp M&J..,3..,. 192.-... 

from  - C..,...W.«....KiaalaM..&...C,o.;. 

the  property  described  below,  in  apparent  good  order,  except  as  noted  (contents  and  condition  of  contents  of  packafres  unknown), 
marked,  consigned,  and  destined  as  indicated  below,  which  said  company  (the  word  company  being  understood  throughout  this 
contract  as  meaning  any  person  or  corporation  in  possession  of  the  property  under  the  contract)  agrees  to  carry  to  Its  usual  place 
of  delivery  at  said  destination,  if  on  its  own  road  or  its  own  water  line,  otherwise  to  deliver  to  another  carrier  on  the  route  to  said 
destination.  It  is  mutually  agreed,  as  to  each  carrier  of  all  or  any  of  said  property  over  all  or  any  portion  of  said  route  to  destin- 
ation, and  aa  to  each  party  at  any  time  interested  in  all  or  any  of  said  property,  that  every  service  to  be  performed  hereunder 
shall  be  subject  to  all  the  conditions  not  prohibited  by  law,  whether  printed  or  written,  herein  contained,  including  the  conditions 
on  back  hereof,  which  are  hereby  agreed  to  by  the  shipper  and  accepted  for  himself  and  his  assigns. 


Consigned  to W..,....H.,... Ingram 1873  Elm  St .     

Destination ., PittSlDUrgh. State  of Pa  .  County   of Allegheny... 

Route Yo»i...lina 

Car  Initial  Car  No 


No. 
Packages 

DESCRIPTION  OF  ARTICLES.  SPECIAL 
MARKS.  AND  EXCEPTIONS 

•WEIGHT 
(Subject  to 
Correction) 

Class 
or  Rate 

Check 
Column 

If  this  shipment  is  to  bo 
delivered  to  the  consignee 
without  recourse  on  the  con- 

60 

3ck3.  #1  Corn 

6082# 

signor,  the  consignor  shall 
sign  the  following  statement: 

....60  . 

.    "         #2  Corn    

6ii4# 

Tha  carrier  shall  not  make 
delivery  of  this  shipment 
without   payment   of   freight 

....5.0. 

" Oats. _ 

3.8.491 

and  all  other  lawful  charges. 
(See  section  7  of  conditions.) 



(Signature  of  consignor.) 

If  charges  are  to  be  prc- 

Received  $ 

to   apply   in    prepayment   of 

the  charges  on  the  property 

Agent  or  Cashier. 

•Tf  the  shipment  moves  between  two  ports  by  a  carrier  by  water,  the  law  requires  that  the  bill  of  lading  shall  state 
whether  it   is   "carrier's  or  shipper's   weisht." 

only  tht  amount  prepaid.) 

Note. 
writing  th 

The  a 
not  exceec 

—  \V  here  the  rate  is  dependent  on  value,  shippers  s 
e  agreed  or  declared  value  of  the  property, 
greed  or  declared  value  of  the  property  is  hereby  sp 
ing-— per 

re  required  to  st 
ecifically  stated  bj 

ate  speci 
the  ship 

fically  in 
per  to  be 

Charges  advanced; 

C.^...W  ^..Ze.eland  &  Co , shipper. 

Per C3<4-  -(S' (3^^^^%^. Per    

Permanent  post-office  address  of  shipper 8.08.  .CQianierGe...St  v,     CinClliaati.,....Qij.lO...... 


Illustration  No.  79,  Original  Straight  Bill  of  Lading. 
(For- back,  shipping  order  and  memorandum  see  pages  192,  193  and  195.) 

promptly  and  in  good  condition,  the  consignee  may  not  be  required  to  present 
the  bill  of  lading,  but,  if  it  is  received  in  "bad  order"  or  is  lost  in  transit,  the  con- 
signee will  have  to  submit  the  original  bill  of  lading  as  evidence  of  his  ownership 
of  the  merchandise.  The  transportation  company  will  adjust  with  the  consignee 
any  claims  for  damages  or  loss  to  the  merchandise  while  in  transit. 

The  memorandum  is  retained  by  the  shipper  as  evidence  of  the  shipment. 
In  case  the  merchandise  shipped  is  not  delivered  promptly,  the  consignee  may 
request  the  shipper  to  ask  for  a  "tracer."    This  tracer  is  a  written  communication 


192 


BUSINESS  FORMS  AND  VOUCHERS 


Sec  1.  (a)  Tbe  i 

be  liable  ^s  at  commoD 

(b)    No  carnef  oi 


delay  caused  by  Ore  c 


CONTRACT    TBRAIS 

r  party  Id  possession  of  aor  of  ibe  property  herein  described  chall 


lUbUlty  sbali  tw  thai  < 


AJtfo  coNO/r/OJvs 


•  allowed -by  tarllTs  lawfully  i 


:  the  port  of  export  <lf  InteniJeiJ  for 
to.  and  after  plicemeot  of  the  property  for  deli«ry 
'  property  to  tbe  patty  entitled 


r  party  In  pouetsion   (and  I 
ler  or  party  In  possession). 


«n  made.  Except  in  case  i 
mrden  to  prote  freedom  from  such  net 
carrier  or  party  io  possession  sbaJl  i 
property  Is  stopped  and  beld  io  tran 


•carrier's  responsibility  shall  < 


I  urrler's  iudemest,  and  in  any  such  tase 
se  when  properly  Is  so  dUchirgcd,  or  property  may  be  murned 
I  shipping  point,  earning  tfelEhl  both  ways,  QuaraDlme  tipeoses 
1  or  In  respect  Io  property  shall  tie  borne  by  the  owneri  of  tb« 
Tbe  carrier  shall  not  be  liable  for  loss  or  damage  occasioned 
1  or  olhef  acts  required  or  done  by  cmaranliDe  regulations  or 
e  may  hate  been  done  by  carrier's  officers,  ageots.  or  employees, 
nage  of  any  kind  occasioned  by  cruaraotlJie  or  the  eDforcesBeot 
ible.  eieept  Id  case  of  negligence,  for  any  Dksuke  or  loarniracy 


regulailoos.  The  shipper  shall  bold  tbe 
or  damages  thry  nay  bt  required  to  pay, 
by  this  contract  Into  any  place  against 

See.  2.    <a)    No 


rier  is  bound  to  transport  said  property  by  any  particular  train  or 
lessel.  or  In  lime  for  any  particular  market  or  otbcrriso  tlian  with  reasonable  dispatch.  Eiery 
carrier  shall  haie  the  right  in  case  of  physical  necessity  to  forward  said  property  by  any 
carrier  or  route  belncen  the  point  of  shipmcot  and  the  point  of  destination.  In  all  cases  not 
prohibited  by  law,  vhere  a  lower  taluc  than  actual  ralue  has  ~ 
shipper  or  has  been  agreed  upon  to  writing  as  the  released 


by  1 
if   paid  : 


!  classiScalio 
be 


stiffs  I 


I  tbe  r 


maiiouiD  amount  to  be  recoiered. 

Injury  to  property  ' 


I  lower  Talue  plus  Iteiglit  charges 
ler  or  not  such  loss  or  damage 


ttalflc. 

ke  deiliery.  then  within  six  months  (or  t 
time  for  dellTery  has  elapsed:  pronded  tt 
damage  while  being  loaded  or  unloaded. 


refused  by  consignee  or  i 
It  shall  tail  to  retttve 
ot  further  deterioraitoo, 
Tbat  If  time  senes  tot 


■  procedure  proilded  I 


has  been  transported  hereunder  to  destinstioQ  b 
ceire  II,  or  said  consignee  or  party  entitled  to  recelie 
irrler  may.  In  Its  discretion,  to  prevent  deltrlor&llon 
le  best  adraolage  at  ptiiate  or  pvblie  sate:  Pnttded. 
'  consignor  ot  owner  of  the  telusa]  of  the  ptoperty 
<t  dispojilioo  of  tbe  property,  such  DOtiScalloa  shall 
t  due  diligence  requires,  btfote  the  property  is  fuld. 
in  tbe  t«o  paragraphs  last  ptecedjog  is  oot  possible. 


,  sale,  snd  other  i 

prvperiy,  it  proper  care  ot  the  same  requires  special  apense, 

shall  be  paid  to  tbe  owner  of  tbe  property  sold  hereunder. 

(f)  Property  destined  to  or  taken  truo  a  Elation,  wbail 
regubrly  appointed  freight  agent   shall  be  entirely  at  risk  i 


1  should  there  be  a  balance  U 
'  landing  at  vhkb  there  b  do 


'  delifered  to  such  i 


1  attet  tbey  ate  detached  ftom  locumotite  < 


3  and  a  stipulated  i 


9  articles  are  ludijrsed 
See.  6.     Eiery  party,  whether  principal  or  agent,  shipping  eiplosire)  or  dangerous  goods. 


lawful  charges  accrtilng  on  said  property:  but.  eic^pt  in  those  Instances  where  it  may  lawfully 
be  authorized  to  do  so.  no  eatrlet  by  ralltoad  shall  dellrer  or  relinquish  possesion  at  destina- 
tion of  the  property  corered  by  this  bill  ot  lading  until  all  tariff  rates  and  charga  thereon 
hate  beta  paid.  The  consignor  shall  be  lUble  fot  tbe  ttelghl  and  all  other  bwful  eha«es, 
except  that  If  the  consignor  stipulates,  by  signature.  In  the  space  provided  for  that  purpose 
on  the  face  of  this  bill  of  lading  that  the  carrier  shall  not  make  dellrery  without  tequlrtng 


such   stipulation. 


make   dellrery 


herein  shall  limit  the  right  ot  the  carrier  to 
Euaraclee  of  the  charges-  If  npon  inspection 
DQt  those  described  in  thb  bill  of  lading,  tbe 
actually   shipped. 


for   such   charges.      Nothing 
requite  at  time  ot  shipment  the  prepajmeot  ot 
It  Is  ascerUloed  < 
freight  charges  on 


I  of  lading,   shall  be  i 


!  Instituted  only  within 


'   loss,   damage,   injury. 


delitery  ha:  elapsed:  Provided,  That  in  case 
writing  within  sit  months,  nt  nine  months  ic 
fuch  claim  is  required  as  i 


precedent  to  recfterj),  suit  shall  be  instituted  not  later 
:e  In  writing  is  given  by  the  carrier  to  the  claimant  that 
'  any  part  or  parts  thereof  speciOed  in  the  notice. 
m  account  of  loss  of  or  damage  to  any  of  lald  property 
ranee  that  may  hare  been  effected  upon  or  on  account  ot 
"    ■  I  policies  or  contracts  ot  Insurance:    Provided, 


'  cooperage  and  baling  at  owner's  cost,     E 
I  be  transported  hereunder  shall  hare  I 


'  reimburse  the  clai 

Sec.  3.     Except  where  such  : 
property  shall  be  subject  to  necess;  _ 
whose  route  cotton  or  cotton  llnters  1 
its  own  cost  and  risk,  of  compressing  I 
and  shall  not  be  held  responsible  for  derbtion  or  unaroid 
pression.     Grain  Io  bulk  ci>nsigned  (o  a  point  where  theri 
elnator,  may   {unless  otherwise  expressly  ooted  herein,  and  1 
be  thrre  drlnrrrd  and  plared  with  other  grata  of  the  same 
onner':h;r   (and  prompt  notice  thereof  shall  be  clten  to  the 
be  subject  to  a  lien  for  einator  charges  in  addition  to  all  other  charces  betrundfr. 

Sec.  4.  (a)  Ptoperty  oot  remoted  by  the  party  entitled  to  receife  It  within  the  free  time 
allowed  by  tariffs,  lawfully  on  flie  (such  tree  time  to  be  computed  as  therein  ptJtIded),  tflet 
Dolire  of  the  arriial  of  the  property  at  destination  or  at  the  port  of  export  (If  Intended  for 
esp[«rt)  has  been  duly  sent  or  glTpn,  and  after  placement  of  the  property  for  deliieiT  at  desti- 
nation has  been  made,  may  be  kept  Io  vessel,  car,  depot,  warehouse  or  place  of  dellTery  ot 
age  and  to  carrier's  responsibility  as  warehouse- 


man, only.  01  at  the  option  of  the  carrier,  may  be  remoTed 
warehouse  af  the  place  of  delhery  or  other  available  place,  at  the  cost  of  the  owner,  and  Ihetc 
held  without  liability  on  the  part  of  tbe  carrier,  and  subject  to  a  lien  for  all  freight  and  other 
lawful  charges,  including  a  reasonable  charge  for  strrage. 

(bl    Where  nonpertshable  property  which  has   been  transported 
refused  by  rnnslgnee  or  the  party  entitled  to  receive  It.  or  said  coi 

receive  It  falls  to  receive  It  within   IS  days  after  notice  of  arrival  shall  have  been  duly  sent 
or  given,  the  carrier  may  sell  the  same  at  public  auction  to  the  highest  bidder,  at  such   place 

have  first  mailed,  cent. 
>r  remains  unclaimed,  as 
win  be  subject  to  sale  tinder  the  terms  ot  the  Mil  of  ladlne  If 
disposition  be  not  arranged  for,  and  shall  have  published  notice  containing  a  description  of  th« 
property,  the  name  of  the  party  to  whom  consigned,  or,  if  shipped  order  notify,  the  name  ot 
tbe  party  to  be  ootiQed.  and  the  time  and  place  ot  sale,  once  a  week  for  two  successive  weeks. 
In  a  newspaper  of  general  circulation  at  the  place  of  tale  or  nearest  place  where  ineh  news- 
paper Is  published:     Provided.  That  30  day)  shall  have  elapsed  before  pubtiratinn  of  notice  of 


ute   I 
or  give 


said  notice  that  the  property  was  refused  or  remains  unclaimed 


[cmptions  from  liability  contained   in. 


limited  liability,  and  I 


I  provisions  of.   and 
the  I'nlted  BUles, 

>t   the  protectlcD  of 
,  Inconsistent  thete- 


r  shall  be  Ibble  fot  any  1 


shafts,  unless  caused  by 
(c)    If  the  owner  s 
seaworthy  and  properly  manned,  equipped, 


d  due  dlligenc 
supplied. 


bursting  ot  bollets  ot  bteakag^  ef 
making  the  vessel  la  all  respects 


carrier  shall  be  liable  for  i 
'damage"  resulting  ftom  the  perils  of  the  lakes,  seas,  or  other  waters.  o»  from  latent 
defects  In  hull,  machinery,  or  appurtenances  whether  existing  prior  to,  at  the  time  of, 
saillce.  or  from  collision,  sttanding.  or  other  accidents  i" 
voyage,     And,  when  for  any  teason  It  Is  necessary. 


properly  hrtetn  described  shall  be  i 


liber 


and  be  towed,  to  Iransfet. 
goods  at  any  time,  to  assist  vessels  In  distress, 
property,  and  for  docking  and  repairs.  Except  in 
responsible  tor  any  loss  or  damage  to  property  if  J 


call 


from   prolonEatloo  i 
t  tessel  eattylng  i 
.  any  pott  ( 


aU  ot  I 


■  lighter.  Io  lead  and  discharge 
Q  deviate  for  the  purptite  of  Gavlng  life  or 
case  of  negligence  wcii  carrier  shall  not  be 
.  be  peccssary  or  b  usual  to  carry  tbe  tame 


(d)    Ceneral  Everage  shall  be  payable  acecrding  to  Torl-ADlwctp  Buks,   1890^  and 
tn  any  matter  not  therein  provided  for.  according  to  the  law  and  '  """  """* 

Tork.     If  the  owners  shall  have  exercised  due  diligence  to  make 
(eaworlhy  and  properly  manned,  equipped  and  supplied.   It   Is  hereby  agreed 
danger,  damage  or  disaster  resiling  from  faults  or  errors  In  tiaTlgatt' 


from  unseaworthrn 


1  the  T 


(prorided   the  latent    or   other   defects  < 


>  beginning  ot  < 


discoverable 

due  diligence),  the  shippers,  conslgne-s  and/ot  owners  of  the  cargo  shall  cei 

iialtige   and  any   special   charges  Incurred  In   respect  of  the  cargo,   and  shall   e 


thtleis 

tribute  with  the  shipowner  In  general 

of  a  general  average   nature  that  may  be  made 


■  IncBTTed  for  tbe  i 


ptoridea  that  any  carrier 


carriers  the  provisions  of  this  section  shall  be  nodlfled 
Bions,  which  shall  be  regarded  as  Incorporated  _ 

(f)    TTie  term  "water  carriage"  In  this  section  shall  not  be  conitnied 
crage  In  or  across  rivers,   harbors,  or  lakes,  when  performed  by 


of  thb  blU  of  lading- 


Sec.  10,    Any  atterxtlon.  addition. 
I  the  special  notation  hereon  of  tbe  agent  ( 


in  this  bill  of  lading  which  i 


Illustration  No.  79— Continued.     Reverse  Side  of  Straight  Bill  of  Lading. 
(For  front  of  bill  of  lading,  see  page  191.) 
from  the  agent  who  received  the  shipment  to  the  agent_  to  whom  it  is  consigned, 
or  the  agents  at  transfer  points  between  the  shipping  point  and  destination. 

There  are  two  forms  of  bill  of  lading,  "straight"  and  "order."  The  straight 
bill  of  lading  is  used  when  the  merchandise  is  shipped  to  the  consignee  on  open 
account,  or  when  he  pays  for  the  merchandise  before  it  is  shipped.  The  order 
bill  of  lading  is  used  when  the  merchandise  is  shipped  by  freight  collect  on  delivery; 
that  is,  when  the  consignee  is  not  to  have  possession  until  he  pays  for  the  mer- 
chandise. Illustration  No.  79  (pages  191,  192,  193  and  195)  shows  the  three  copies 
required  in  connection  with  a  straight  bill  of  lading;  the  order  bill  of  ladmg  is 
shown  in  Illustrations  Nos.  84  and  85.  ' 


BUSINESS  FORMS  AND  VOUCHERS 


193 


UnifsTB  Doaimtk  Stnivbl  BUI  of  Lodioc  Adopted  by  C*rTl«ra.  March    16.   19:1 

rrWTC    CTTTPPTAJP    niJnFl?    must  be  legibly  filled  in,  in  Ink,  in  Indelible  Pencil,  or  in  Shipper's  No- 

XniC^    ^^nlrl'li'^i\J    \JMXUCaSX  carbon,  and  reUined  by  the  Agent. 

Agent'a    No. 

^ _ B,..&:..0,. S,,...W., Railroad Compaiiy 

RECEIVED,  subject  to  the  classifications  and  tariffs  in  effect  on  the  date  of  the  issue  of  this  Shipping  Order, 

at C.inc.imi&..t;l.....Qhi.o. - Max..§.A 192 

from - C.,i...l......Ks,alaM.S;...C.ft.r 

the  property  described  below,  in  apparent  good  order,  except  as  noted  (contents  and  condition  of  contents  of  packages  unknown), 
marked,  consigned,  and  destined  as  indicated  below,  which  said  company  (the  word  company  being  understood  throughout  this 
-     '    ■-'*  af  •   ^ — "ne  sdv  nprson  or  corporation  in  nossession  of  the  property  under  the  contract)  agrees  to  carry  to  itp  usual  place 

-'herwiso  t"  -■->(•-         -nnth --=—  «-  •■  .te  to  said 

EXPLANATION.  The  shipping  orcier  is  the  same  size  as  the  original  bill  of  lading  illus- 
trated on  page  191;  it  is  not  all  repeated  here  because  that  part  not  shown  is  the  same  as  on  page 
191. 

§  180.  A  Credit  Bill  is  a  receipt  in  invoice  form,  setting  forth  in  detail  the 
nature  of  the  credit  for  which  it  is  issued.  A  credit  bill  may  be  rendered  for  cash, 
merchandise  returned,  an  allowance,  service,  or  anything  of  value  with  which  the 
account  of  the  one  to  whom  it  is  sent  has  been  credited.  The  forms  provided  for 
credit  bills  are  usually  printed  with  a  different  colored  ink  from  the  sales  invoice 
forms.     Illustration  No.  80  shows  one  form  of  credit  bill. 


CREDIT   BILL 


C.  W.  KEELAND  8c  CO. 

DEALERS  IN 

HAY.  GRAIN,  FEED 
AND  COAL 


"^SCCi 


^^^g^^   /^ 


J^^^^z^ 


y^^^_^^^z^^^^ 


WE    CREDIT    YOUR  ACCOUNT   AS   FOLl-OWSl 


<^^Ci9r^^^^Zg^^    (^^^y^^/l^^^-y'i^ii^^i/J  J2/' 


/ 


J2.^ 


A 


T'T-'^p^-gf-yi 


ti^-y-^ 


-^^^^i^y]^^ 


Illustration  No.  80,  Credit  Bill. 

§  181.  A  Telegram  is  a  communication  or  message  sent  by  means  of  a 
telegraph  company.  The  rate  for  transmitting  a  message  is  based  on  a  minimum 
number  of  words  and  the  time  of  sending.  There  are  four  classes  of  telegrams: 
the  fast  day  message,  day  letter,  night  message,  and  night  letter. 

^  I.  A  Fast  Day  Message  is  accepted  by  the  telegraph  company  to  be  sent 
as  soon  as  received  and  delivered  at  its  destination  as  soon  as  received.  The  rate 
is  based  on  ten  words  with  a  fixed  charge  for  each  word  in  excess  of  ten.  See 
Illustration  No.  81. 

*\  2.  A  Day  Letter  is  accepted  by  the  telegraph  company  to  be  sent  some 
time  during  the  day  and  delivered  when  received  at  its  destination.  Fast  day 
messages  take  precedence  over  day  letters  both  in  the  sending  and  the  delivering. 
The  rate  is  based  on  fifty  words  with  a  fixed  charge  for  each  word  in  excess  of  fifty. 


194 


BUSINESS   FORMS  AND  VOUCHERS 


POSTAL  1 

rELEGRAPH  -  COMMERCIA 

CLARENCE  H.  MACKAY,  PRESIDENT 

TELEGRAM 

THE  POSTAL  TELEGRAPH-CABLE  COMPANY  [INCORPORATED! 
TRANSMfTS  AND  DELIVERS  THIS  MESSAGE  SUBJECT  TO  THE 
TERMS  AND  CONDITIONS  PRINTED  ON  THE  BACK  OF  THIS  BLANK. 

L  CABLES 

CLASS  OF  SERVICE  DESIRED 

RECEIVER'S  NUMBER 

FAST  DAY  TELEGRAM 

X 

NIGHT  TELEGRAM 

CHECK 

NIGHT  LETTERGRAM    1 

SITE  THE  CLASS  OF  SERVICE  DESIRED: 

OTHERWISE      THE       TELEGRAM 

WILL     BE    TRANSMITTED    AS    A 

FAST   DAY   TELEGRAM 

TIME  FILED 

SEND  the   following    Telegram,   tubject  to  the 
terms  on  back  hereof,  which  are  hereby  agreed  to 

Cincinnati,  Ohio.,  May  12,  192 
Short  Bros. , 

Cleveland. 
Number  one  corn  sixty  seven  cents  bushel  f.  o.  b.  cars  here. 


C.  W.  ZEELAND  &:  CO. 


PREPAID 


Illustration  No.  8i,  Fast  Day  Message,  %  i. 

^3.  A  Night  Message  is  accepted  by  the  telegraph  company  to  be  sent 
during  the  night  and  delivered  the  next  morning.  The  rate,  which  is  based  on 
ten  words  with  a  fixed  charge  for  each  word  in  excess  of  ten,  is  less  than  that  for 
the  fast  day  message. 

^4.  A  Night  Letter  is  accepted  by  the  telegraph  company  to  be  sent  during 
the  night  and  delivered  the  next  morning.  The  rate,  which  is  based  on  fifty  words 
with  an  extra  charge  for  each  word  in  excess  of  fifty,  is  the  same  as  that  for  the 
fast  day  message. 


CLASS  OF  SERVICE  DESIRED 

Telegram                     I 

Day  Letter                     j 

Night  Message 

Night  Letter                     X 

Patrons  should  mark  an  X  oppo- 
site the  class  of  service  desired: 
OTHERWISE  THE   MESSAGE 
WILL  BE  TRANSMITTED  AS  A 
FULL-RATE  TELEGRAM 

WESTERN  UNION 
TELEGRAPH  CO. 

TELEGRAM 


NEWCOMB  CARLTON,  President 


GEORGE  W.  e.  ATKINS,  First  Vice-President 


Send  the  following  message,  subject  to  the  terms 
on  back  hereof,  which  are  hereby  agreed  to 


Anderson,    Peck  &  Pov/ler, 


Cincinnati,  Ohio,  May  14,  192 


Clinton.  N.  Y. 

Past  freight  Short  Bros.,  Cleveland,  one  car  number  one  corn, 
and  W.  H.  Ingram,  Pittsburg,  one  car  number  one  hay.   Show 
freight  rate  on  bill  of  lading  sent  each  consignee.   Send 
invoice  to  us  and  charge  to  our  account.  Advise  us  freight 
rate  on  each  shipment. 


PREPAID 


C.   W.   XEELAND  &   CO. 


Illustration  No.  82,  Night  Letter,  ^  4. 


EXERCISES 


195 


Uniform  Donalk  Smith)  BUI  of  Lsdlni  Alopud  fcr  Carricra.   Mucb    It.    KU 


*rif|n   UCIUIAD  AUI\7TU   i^  an  acknowledgment  that  a  Bill  of  Lading  has  been  issued  and  is 

llllO  Ill£lUUlUlill/Ufll   "»t  'he  Original  Bill  of  Lading,  nor  a  copy  or  duplicate,  covering  the 

property  named  herein,  and  is  intended  solely  for  filing  or  record. 


Shipper's  No... 
Agent'a    No 


B.   &  0.    S.  W.   Hallroad 


■Company 


RECEIVED,  subject  to  the  classifications  and  tariffs  in  effect  on  the  date  of  the  receipt  by  the  carrier  of  the  property  described 
in  the  Original  Bill  of  Lading, 

gj  .Cincinnati,   Ohio     _ , .M^.y....^..  192 

£„m'7'""'''-'''''''''---''''--^-''------^  '■■" 

the  property  described  below,  in  apparent  good  order,  except  as  noted  (contents  and  condition  of  contents  of  packages  unkrtown), 
marked,  consigned,  and  destined  as  indicated  below,  which  said  company   (the   word  company   being  understood   throughout  this 
contract  as  meaning  any  person  or  '•'^'•-^'^ration  in  possession  of  *>"  "    " — '"^v  unri^r  t.he  contracts  agrees  to  carry  to  its  usual  place 
■  "Hfi  deatinati''"  •'  -■      .  *  •       -.,,,.;,.,  _ 

EXPLANATION.  The  position  of  the  three  forms  of  the  bill  of  lacJing  is  illustrated  by  pages 
191,  193  an(J  195;  these  pages  contain  all  the  information  for  the  three  forms,  that  part  omitted  on 
forms  two  and  three  being  shown  on  pages  191  and  192. 

§  182.  Statement  of  Account.  It  is  customary  for  business  concerns  to 
send  each  customer  a  statement  of  his  account  on  the  first  of  the  month.  The 
purpose  of  this  statement  is  to  permit  the  customer  to  audit  his  account  and  report 
any  discrepancies.  The  information  given  on  the  statement  is  obtained  from  the 
ledger  account  with  the  customer  to  whom  it  is  sent.  The  statement  should  show 
(a)  the  balance  due  from  the  customer  at  the  beginning  of  the  month,  (b)  the  date 
and  amount  of  each  debit  entry,  (c)  the  date,  nature,  and  amount  of  each  credit 
entry,  and  (d)  the  balance  due  from  the  customer  at  the  end  of  the  month. 

On  the  first  of  the  month  the  business  will  usually  receive  a  statement  from  each  of  its  creditors 
showing  the  transactions  completed  during  the  month.  The  statement  should  be  compared  with  the 
account  with  the  creditor  and  errors  reported  promptly. 


MONTHLY  STATEMENT  OF  ACCOUNT 


',.""^^°  M 


ONTHLY  STATEMENT  OF  ACCOUNT 


i^>,^.^   X  19    


--^-Z^y/    IQ 


IN  ACCOUNT  WITI 


^ 


C,   W.   KEELAND   a   CO. 

HAV,    GRAIN,    FEED  AND    COAL 


C.   W.    KEELAND   a   Co. 

HAY,     GRAIN,    TEED  AND    COAL 


Ralanrr 

^^^ 

y-x 

M,hr     p"    fl'"   Rf"!'-'"! 

jiy^ 

f7^ 

y 

^^ 

/yy 

rr 

/^ 

1 

■^ 


\hltr     prr   Bill   RrnrlrrrJ 


"^^Z.^^^ 


^X 


..2^ 


f^  ^^ 


^^' 


,/v 


.y(t/ 


.Zjr  . 


£^ 


^;z^ 


Illustration  No.  83,  Statements  of  Account. 

EXPLANx'\TION.  The  statement  at  the  left  was  prepared  from  a  ledger  account  showing 
two  debits  and  no  credits  and  the  one  at  the  right  from  a  ledger  account  showing  a  balance  from 
a  preceding  month,  a  debit  and  two  credits. 

Exercise  No.  72,  Business  Letters  and  Credit  Bill 

March  17,  Rice  Bros.,  Clinton,  returned  to  the  Julian  Shoe  Company,  New 
York,  six  pairs  shoes  which  were  billed  at  $6.20  per  pair  in  invoice  of  March  i. 
The  shoes  were  returned  because  the  sizes  were  not  according  to  specifications 
in  the  order.     Credit,  is  asked  for  the  value  of  the  shoes. 

1.  Prepare  on  a  sheet  of  paper  8J4  inches  by  11  inches,  the  letter  which 
Rice  Bros,  would  write,  signed  "Rice  Bros."  by  your  name. 

2.  Prepare  on  a  sheet  of  paper  8>^  inches  by  ii  inches,  an  answer  to  this 
letter  under  date  of  March  25,  acknowledging  receipt  of  the  shoes  and  enclosing 
credit  bill. 


196 


EXERCISES 


Exercise  No.  73,  Straight  Bill  of  Lading. 

July  7  the  Evans  Bros.  Hardware  Company,  519  Broadway,  Cincinnati, 
shipped  via  B.  &  O.  freight  to  Wolf  &  Church,  305  Main  St.,  Marysville,  Union 
County,  Ohio,  10  kegs  nails,  100  lbs.  each;  i  case,  12  gal.  paint,  125  lbs.;  i  case, 
2  doz.  picks,  75  lbs.;  i  bundle  containing  2  doz.  handles,  25  lbs.;  i  case  containing 
I  doz.  shovels,  30  lbs. 

Rule  a  sheet  of  paper  similar  to  the  illustration  on  page  191,  and  write  on  this 
in  the  proper  position  the  information  required  to  prepare  the  bill  of  lading  for 
this  shipment.  It  will  not  be  necessary  to  make  the  two  extra  copies  nor  to  copy 
the  printing  in  the  illustration. 

Exercise  No.  74,  Statements  of  Account. 

Render  a  monthly  statement  for  each  of  the  following  accounts  under  date 
of  November  i : 


(^C-Z?t,.-c!^^''7*-7^-'V-'€^ 

'?>- 

/f>- 

0^ 

/  0 

^  5-  »-.  .i-o 

Ju 

>  >  ■>■ 

d^a 

0.^ 
^1^ 

'I 

Jt^^-^t-^^^W--  O^^t-'^-^^.    ' 

3,6 

/   0  c 

_J»2^^ 

/ij' 

/  t/.f^O 

J.. 

/     /    ^ 

?-^ 

'^'>' 

(I,. 

/  /y  a 

(^a- 

■^ 

<J-J-r 

/  j^-r 

d^r^ 

T-S- 

Cyf^C^^p-e^o^TPi^'p^L'^:'^^   y-  cT 

/  ?- 

J'O 

/^ 

if.^0 

J,. 

J     J     r 

>^ 

Qyd 

>-    6    > 

^. 

Use  blank  statements  of  account  which  may  be  purchased  from  a  stationery 
store,  or  blank  forms  used  by  a  local  merchant;  if  neither  of  these  is  available, 
rule  paper  similar  to  one  of  the  statements  in  Illustration  No.  83.  Use  your  name 
as  the  name  of  the  merchant  who  is  rendering  the  statements. 

QUESTIONS 

I.     (a)  Why  should  a  copy  of  each  letter  written  be  retained?     (b)  Why  should 

this  copy  be  filed?     (c)  Why  should  the  letter  which  it  answers  be  filed 

with  it? 
(a)  Why  does  a  merchant  send  each  of  his  customers  a  statement  on  the 

first  of  the  month?     (b)  What  facts  are  shown  on-  each  statement? 
Why  are  statements  of  account  usually  rendered  on  the  first  of  the  month? 
What  term  is  used  to  describe  the  receipt  issued  by  a  transportation  company 

for  merchandise  accepted  by  it  for  shipment? 
Why  are  the  railroad  companies  required  to  use  a  uniform  size  blank  for 

issuing  receipts  for  merchandise  accepted  for  shipment? 
What  information  should  be  given  in  the  receipt  issued  by  a  transportation 

company  for  merchandise  accepted  for  shipment? 
Why  would  the  City  National  Bank  require  certification  of  a  check  drawn 

on  the  First  National  Bank,  and  presented  to  it  in  payment  for  a  note 

which  it  holds? 
Why  would  it  be  advisable  for  an  individual  who  wished  to  open  an  account 

with  the  bank,  using  a  check  as  his  first  deposit,  to  have  the  check  certified 

before  presenting  it  for  deposit? 
Is  there  any  distinction  between  the  terms  "business  form"  and  "voucher?" 
Why  should  the  bookkeeper  file  each  business  form  or  voucher  which  serves 

as  a  basis  for  the  bookkeeping  record? 


2. 

3- 
4- 

5- 


9. 
10. 


Chapter  XX 

GENERAL  INFORMATION 

The  Purpose  of  this  Chapter  is  to  explain  trade  customs  and  bookkeeping 
procedure  with  which  the  student  of  bookkeeping  should  be  familiar.  The  student 
cannot  be  expected  to  record  correctly  transactions  involving  discount  because 
of  prompt  payment  unless  he  thoroughly  understands  the  subject  of  merchandise 
discount.  Each  student  should  know  the  method  of  procedure  followed  by  ex- 
perienced bookkeepers  in  detecting  and  correcting  errors. 

§  183.  Terms  on  Invoices.  When  merchandise  is  sold  on  account,  a 
definite  date  of  settlement  is  expressed  or  implied.  If  the  date  of  settlement  is 
not  expressed,  it  is  usually  implied  that  the  amount  is  due  on  the  first  of  the  follow- 
ing month.  When  a  specific  date  of  settlement  is  agreed  upon,  or  when  discount 
is  allowed  for  payment  within  a  specified  time,  this  information  is  written  on  the 
invoice.  Space  is  usually  provided  on  the  invoice  after  the  word  "Terms"  for  all 
information  in  regard  to  the  terms  of  sale.  Thus,  "30  days"  indicates  that  the 
amount  of  the  invoice  is  due  thirty  days  from  the  date  of  the  invoice;  "2/10,  n/30" 
indicates  that  the  full  amount  of  the  invoice  is  due  thirty  days  from  its  date,  but 
if  the  purchaser  pays  it  within  ten  days  from  the  date,  a  discount  of  2%  may  be 
deducted  from  the  amount  of  the  invoice;  an  invoice  rendered  September  i  with 
''5/10,  3/30,  n/6o"  written  after  "Terms"  indicates  that  the  seller  has  given  the 
buyer  sixty  days  from  September  i  for  full  settlement  of  the  invoice,  or  will  allow  a 
discount  of  5%  if  paid  within  ten  days  or  a  discount  of  3%  if  paid  within  thirty 
days  from  September  i. 

§  184.  Payment  of  Invoice  Subject  to  Discount.  When  the  purchaser 
pays  an  invoice  subject  to  discount  within  the  terms  of  the  purchases  invoice,  he 
ascertains  the  amount  of  the  check  by  deducting  from  the  amount  of  the  invoice 
the  discount  mentioned  in  the  terms.  Thus,  if  the  terms  are  2%  10  days,  and 
the  amount  of  the  invoice,  $150.00,  the  check  would  be  written  for  $147.00.  The 
one  issuing  the  check  debits  the  firm  to  whom  it  is  issued  for  the  full  amount  of 
the  invoice  ($150.00),  and  credits  Cash  for  amount  of  the  check  ($147.00)  and 
Purchases  Discount  for  the  amount  of  the  discount  ($3.00).  The  one  who 
receives  this  check  debits  Cash  for  the  amount  of  the  check  ($147.00)  and  Sales 
Discount  for  the  amount  of  the  discount  ($3.00),  and  credits  the  account  with 
the  drawer  of  the  check  for  the  full  amount  of  the  sale  ($150.00). 

If  only  a  part  of  an  invoice  subject  to  discount  is  paid  within  the  terms  of  the 
bill,  the  same  accounts  are  affected,  but  it  is  necessary  to  divide  in  order  to  ascer- 
tain the  amount  with  which  the  creditor's  account  is  debited.  Thus,  if  the  amount 
of  the  payment  is  $98.00  and  the  terms  are  2%,  the  creditor  will  be  debited  with 
$100.00  and  he  in  turn  will  credit  his  customer  with  $100.00.  It  is  necessary  to 
divide  because  each  98c  paid  represents  a  dollar  in  value. 

When  an  invoice  subject  to  discount  is  paid  in  full,  multiply  the  amount  of 
the  invoice  by  the  discount  mentioned  in  the  terms  to  ascertain  the  amount  of  the 
discount.  When  a  partial  payment  is  made  on  an  invoice  subject  to  discount, 
divide  the  amount  of  the  payment  by  100%  less  the  rate  of  discount;  the  quotient 
will  be  the  amount  to  be  debited  to  the  creditor's  account;  the  amount  of  the  dis- 
count is  ascertained  by  subtracting  the  payment  from  the  amount  debited  to  the 
creditor's  account. 

197 


198  GENERAL  INFORMATION 

§  185.  Collecting  Notes  and  Drafts.  The  holder  of  a  note  or  an  accepted 
draft  may  require  the  maker  or  drawee  to  pay  the  note  or  acceptance  at  his  office  or 
at  a  bank.  Where  the  holder  and  the  maker  reside  in  the  same  city,  it  is  customary 
for  the  holder  to  leave  the  note  for  collection  with  the  bank  at  which  he  does  busi- 
ness. Where  the  holder  resides  in  a  different  city  from  that  of  the  maker  or  drawee, 
the  collection  may  be  made  through  the  bank  at  which  the  holder  does  business 
or  a  bank  in  the  same  city  in  which  the  maker  or  drawee  resides.  As  a  rule  the 
maker  of  a  note  will  give  the  name  of  the  bank  at  which  he  does  business  as  the 
place  of  payment,  and  the  drawee  of  a  draft  will  accept  it  as  payable  at  the  bank 
which  presents  it  for  acceptance.  When  the  name  of  the  bank  is  specified  in  the 
note,  the  holder  should  leave  the  note  gr  draft  at  this  particular  bank  before  the 
due  date.  The  endorsement  of  a  note  or  time  draft  left  for  collection  should  be 
qualified  by  writing  "For  collection"  as  explained  in  §  85,  ^  4. 

A  sight  draft  is  usually  made  payable  to  the  bank  which  is  to  collect  it — 
that  is,  the  bank  at  which  the  customer  does  business  or  one  in  the  same  city. 
If  the  collecting  bank  collects  the  sight  draft,  the  drawee  retains  the  receipted 
draft  as  his  receipt  and  the  collecting  bank  pays  the  drawer  with  bank  draft  or 
cashier's  check  (§§  81  and  82).  If  the  drawee  refuses  to  pay  the  sight  draft,  the 
bank  returns  it  to  the  drawer. 

It  is  customary  for  banks  to  charge  a  small  fee  for  collecting  notes,  time  drafts,  and  sight 
drafts.  If  this  fee  is  paid  by  the  holder  it  is  an  expense  to  him;  the  amount  may  be  debited  to 
Administrative  Expense  or  to  an  account  with  Collection  and  Exchange. 

§  186.  Exchange  is  a  term  applicable  to  a  sight  draft  drawn  by  one  bank  on 
funds  deposited  with  another  bank;  it  is  sometimes  referred  to  as  a  bank  draft. 
Exchange  takes  its  name  from  the  city  in  which  the  bank  on  which  it  is  drawn  is 
located.  A  bank  draft  drawn  on  a  bank  in  New  York  City  is  referred  to  as  "New 
York  exchange" ;  a  bank  draft  drawn  on  a  bank  in  Chicago,  as  "Chicago  exchange," 
etc.  When  the  bank  on  which  the  draft  is  drawn  is  located  in  the  same  country, 
the  draft  is  designated  as  "domestic  exchange";  when  it  is  located  in  a  foreign 
country,  as  "foreign  exchange."  Domestic  exchange  is  represented  by  one  draft; 
foreign  exchange  may  be  represented  by  one  draft  or  three;  if  three  drafts  are 
drawn,  each  is  sent  by  a  different  route  with  instructions  to  the  effect  that  when 
one  is  paid  the  other  two  are  not  to  be  paid. 

Exchange  is  due  to  the  volume  of  business  in  the  large  cities.  New  York  City 
sells  far  more  merchandise  to  merchants  throughout  the  world  than  the  merchants 
throughout  the  world  sell  to  New  York  City.  By  requiring  each  merchant  who 
buys  merchandise  from  New  York  to  pay  for  the  same  with  a  check  on  a  bank  in 
New  York,  much  time  can  be  saved  in  the  collection  of  these  checks.  Since  busi- 
ness concerns  in  New  York  usually  insist  on  customers  paj'ing  their  obligations 
with  checks  on  banks  in  New  York,  practically  every  bank  in  the  United  States 
has  funds  on  deposit  with  a  New  York  bank  so  that  the  customers  of  the  bank 
may  be  provided  with  New  York  exchange  when  they  wish  to  purchase  it  for  re- 
mitting  to   creditors   in   New   York. 

A  small  fee  is  usually  charged  by  the  bank  issuing  the  exchange  to  cover  the  interest  and  the 
expense  in  connection  with  issuing  the  exchange.  This  charge  is  an  expense  to  the  purchaser  of  the 
exchange;   it  is  debited  to  Administrative  Expense  or  to  an  account  with  Collection  and  Exchange. 

§  187.     C.  O.  D.  Shipments.     When  the  purchaser  agrees  to  pay  for  the 

merchandise  on  delivery,  the  terms  are  designated  as  "C.  O.  D.,"  an  abbreviation 
of  "cash  on  delivery."  When  the  customer  to  whom  the  merchandise  is  sold  on 
C.  O.  D.  terms  resides  in  the  same  city,  collection  can  be  made  by  the  messenger 
who  delivers  the  merchandise;  if  the  customer  resides  in  another  city,  it  is  necessary 
to  have  the  transportation  company  collect  for  the  merchandise  before  making 
delivery.    The  postmaster  collects  for  C.  O.  D.  parcel  post  shipments,  the  agent  of 


GENERAL  INFORMATION 


199 


tTntfom    DomMtle   Onirr    Bttt    of  Lading  AdoptH  by  Curlers.  Mu-eh    15.    19Z2 

UNIFORM  ORDER  BILL  OF  LADING 

(PRESCRIBED   BY   THE   INTERSTATE   COMMERCE  C0MMI88IUN) 

ORIGINAL 


Shipper's  No... 
Agent's    No 


New  York,  New  Haven  &  Hartford  Railroad 


Company 


Received,  subject  to  the  classificatiLns  and  tariff's  in  ctfect  on  the  date  of  the  issue  of  this  Hill  of  Ladin;,-, 

3t           Cincinnati,   Ohio                                                       September  14                           192 
f„^ C.  •».  Keelarid  &  Co; ^^^     


the  property  described  below,  in  apparent  good  order,  except  as  noted  (contents  and  condition  of  contents  of  packages  unknown), 
marked,  consigned,  and  destined  as  indicated  below,  which  said  company  (the  word  company  being  understood  througjiout  this 
contract  as  meaning  any  person  or  corporation  in  possession  of  the  property  under  the  contract)  agrees  to  carry  to  its  usual  place 
of  delivery  at  said  destination,  if  on  its  own  road  or  its  own  water  line,  otherwise  to  deliver  to  another  carrier  on  the  route  to  said 
destination.  It  is  mutually  agreed,  as  to  each  carrier  of  all  or  any  of  said  property  over  al!  or  any  portion  of  said  route  to  destin- 
ation, and  aa  to  each  party  at  any  time  interested  in  all  or  any  of  said  property,  that  every  service  to  be  performed  hereunder 
shall  be  subject  to  all  the  conditions  not  prohibited  by  law,  whether  printed  or  written,  herein  contained,  including  the  conditions 
on  back  hereof,  which  are  hereby  agreed  to  by  the  shipper  and  accepted  for  himself  and  his  assigns. 

The  surrender  of  this  Original  ORDER  Bill  of  Lading  properlj-  indorsed  shall  be  required  before  the  delivery  of  the  property. 
Inspection  of  property  covered  by  this  bill  of  lading  will  not  be  permitted  unless  provided  by  law  or  unless  permission  is  indorseid 
on  this  original  bill  of  lading  or  given  in  writing  by  the  shipper. 

/Mail   or  atrcet   address  of   consigne* — l-'ot  purposu   of   ooUficatioD  onljA 

(         64  Public  Sq. ,  Huntsville,   Ark) 
Consigned  to    ORDER  OF ^ .. .  W v.  Keeland  &  Co 

Destination...  Huntsville, state  o{....AT'&&n9.B.a County   of.ifa.'i.i.aOXl 

Notify Ifr     Jeffries Je. Co. 

At Huiitsville _ state  of    Arkansas  County  of  Madisop 

Route   19M.  X^M _ _ 

Car  Initial Car  No 


No. 
Packages 

DESCRIPTION  OF  ARTICLES.  SPECIAL 
MARKS.  AND  EXCEPTIONS 

♦WEIGHT 

(Subject  to 
Correction) 

Class 
or  Rate 

Check 
Column 

If  this  shipment  is  to  be 
delivered  to  the  consignee 
without  recourse  on  the  con- 

3      bbls.   New  Orleans  Molasses 

800# 

signor,  the  consignor  shaU 
sign  the  following  statement: 

I       bijl.   Com  Sy -up 

350# 

The  carrier  shall  not  make 
delivery     of     this     shipment 

5       cases  Coffee 

SOOjf 

4 

3 

bags  Coffee 

Mi^!?I' Wrapping' Pajer"^    Z^  "IZ 

cases  N.   C.   Baking  Powder 

54  2| 
i"28# 

and  all  other  lawful  charges. 
(■S^e  section  7  of  conditions.) 

10 

ii05# 

15 

.bbi.3.,....gtie.k..aaM^ 

1604# 

iSignoture  of  conBiRnor.) 

If  charges  are  to  be  pre- 
paid,   write    or   stamp    here. 

Received  $ 

to    apply    in    prepayment  -of 



Agent  or  Cashier. 







•If  the  shipment   moves   between   two  porta  by   a  carrier  by  water,  the  law  requires  that  the  bill  of  ladlns  ahall  state 
whether   it   is   '•carrier's   or   shipper's   weight." 

(The  fiipnature  here  Rcknowledje* 
only   the   amount   prepaid.) 

Note. 
writing  th 

The  a 
not  exceed 

—Where  the  rate  is  dependent  on  value,  shippers  are  required  to  state  specifically  in 

e  agreed  or  declared  value  of  the  property. 

greed  or  declared  value  of  the  property  is  hereby  specifically  stated  by  the  shipper  to  be 

Charges  advanced: 

$ _... 

—E ^^____^-_^_______^_^__^= 

C,  W,    ZESLANI).&   CO. shipper 

Per    0<^...£^r..  (Q«rtr^t-r?^. _ Per 

......    ,  i-  ,   208  Commerce  St., 

Permanent  post^ffice  address  of  shipper — li. 


208  Commerce  St.,   Cincinnati,   Ohio. 


Illustration  No.  84,  Front  of  Order  Bill  of  Lading. 
EXPLANATION.     This  form  is  used  when  a  shipment  is  sent  by  freight  C.  O.  D. 

the  express  company  for  C.  O.  D.  express  shipments,  and  the  bank  for  C.  O,  D. 
freight  shipments.  When  the  terms  are  C.  O.  D.  and  the  purchaser  resides  in 
another  city,  the  seller  should  collect  part  payment;  otherwise  he  may  lose  the 
transportation  charges  both  ways  should  the  shipment  be  refused  and  returned. 
^  I.  Freight  Shipments.  When  a  C.  O.  D.  shipment  is  made  by  freight,  the 
package  is  addressed  to  the  shipper  at  the  address  of  the  consignee  with  a  notation 
to  notify  the  consignee.    An  "order"  bill  of  lading  (§  179)  is  signed  by  the  agent 


200  GENERAL  INFORMATION 


CONTRACT    TERMS  ANU    CONDITIONS 

S«.  1.  (a)  The  carrier  or  party  la  pnssesswo  ct  aoy  of  the  properly  btrelo  described  tbaU    .  (c)    Where  perlsliable  pruperly  which   has   been    UMSported  hereunder  to   destination    b 

be  liable  as  at  common  law  for  any  losa  thereof  or  damage  thurelo.  eicept  as  herelnsftpr  proiided.  -  refused  by  cocsipiee  or  parly  enlilled  to  receite  It,  or  sM  ccnslsnee  or  party  eolllled  to  recelre 

(b)    No  cflftler  or  party  lo  possessioa  of  all  or  apy  of  the  property  herein  described  Etiall  It  shall  fall  (o  receire  it  promptly,  the  carrier  may.   Id   Its  discretion,  to  prereot  delerlorallon 

be  liable  tor  any  loss  thereof  or  (*••           '   -•"'  or  delay  caused  by  the  act  of  Cod,  the  piihUc    I  or  furUier  deUrloralioD,  sell  the  same  '■   *'     '"it  ad»«'--  ■                               ■'»  .-•      »' 


Illustration  No.  85,  Reverse  Side  of  Order  Bill  of  Lading, 

EXPLANATION.  This  shows  the  back  of  the  order  bill  of  lading  with  the  endorsement 
necessary.  The  shipping  order  and  memorandum  are  the  same  as  those  illustrated  at  the  top  of 
pages  193  and  195,  hence  are  not  repeated.  That  part  of  the  conditions  not  shown  in  this  illustration 
is  the  same  as  the  conditions  for  the  straight  bill  of  lading  on  page  192. 

of  the  receiving  railroad  and  the  merchandise  forwarded  to  its  destination,  where 
it  will  be  held  by  the  agent  of  the  railroad  until  the  consignee  presents  the  original 
bill  of  lading.  The  shipper  must  get  this  original  bill  of  lading  into  the  possession 
of  the  consignee,  but  at  the  same  time  he  must  secure  payment  for  the  merchandise 
before  it  is  delivered;  this  is  effected  through  a  bank.  The  seller  draws  a  sight 
draft  for  the  amount  of  the  sale,  attaches  it  to  the  original  bill  of  lading,  and  sends 
these  for  collection  to  a  bank  in  the  city  where  the  purchaser  resides.  When  the 
bank  receives  this  draft  and  bill  of  lading,  it  notifies  the  drawee,  who  secures  the 
bill  of  lading  by  paying  the  draft.  The  purchaser  presents  the  original  bill  of 
lading  to  the  agent  of  the  railroad  and  receives  the  merchandise.  The  bank  remits 
the  amount  of  the  draft  to  the  seller.  If  the  purchaser  does  not  pay  the  draft,  it 
will  be  returned  to  the  drawer  (seller)  and  the  merchandise  will  remain  in  the 
possession  of  the  agent  until  he  receives  instructions  from  the  seller  as  to  its  disposi- 
tion; this  accounts  for  the  suggestion  that  the  seller  collect  a  part  of  the  value  of 
the  merchandise  before  making  shipment. 

The  "order"  and  "straight"  bills  of  lading  are  discussed  in  §  179.  The  form  is  practically 
the  same  except  that  the  order  bill  of  lading  contains  space  on  the  back  for  the  endorsement,  as  it 
is  necessary  for  the  shipper  to  endorse  it  in  order  to  transfer  title  to  the  consignee. 

^  2.  Express  Shipments.  When  a  C.  O.  D.  shipment  is  made  by  express, 
the  express  company  will  not  deliver  the  merchandise  until  the  purchaser  pays  the 
charges  and  value  of  the  shipment.  The  sales  invoice  is  not  sent  to  the  customer 
but  is  enclosed  in  an  envelope  (Illustration  No.  86),  which  is  attached  to  the  pack- 
age. When  the  merchandise  arrives  at  its  destination  the  express  company  agent 
will  hold  it  until  the  consignee  pays  the  amount  of  the  invoice  in  the  envelope. 
After  the  consignee  has  paid  the  amount  of  the  invoice,  he  secures  possession  of 
the  merchandise;  the  express  company  agent  places  in  the  envelope  an  express 
money  order  (Illustration  No.  64)  for  the  amount  of  the  collection  and  returns  the 
envelope  to  the  shipper.  The  shipper  should  specify  that  the  consignee  is  to  pay 
the  charges  for  issuing  the  money  order  sent  in  payment  for  the  C.  O.  D.  shipment; 
otherwise,  the  express  agent  issuing  the  same  will  deduct  the  amount  from  the 
amount  of  the  invoice. 

^  3.  Parcel  Post  Shipments.  When  a  C.  O.  D.  shipment  is  made  by  parcel 
post,  a  special  ticket  provided  by  the  Post  Office  Department  is  attached  to  the 


GENERAL  INFORMATION 


201 


s 

IF  NOT  DELIVERED  IN  THREE  DAYS    RETURN  TO 
TREASURER 

Southeastern  Express  Company 

(INCORPORATED) 
ATLANTA.  GA. 

) 

c. 

\7. 

* 
Ke eland  &  Co. 

FORM   No.   16 

PLACE 

POSTAGE 

STAMP 

HERE 

208  Commerce  St. 

Cincinnati 

Ohio 

SHIPPER-M.rk  shipment  "C.O.D."  and  omounl  lo  be  collected,  encloii 

FOR  GOODS  SHIPPED 


C.  B.   Ja c ks on 


G.O.D. 


16789 


188  Wayne  Blvd. 


Smnter^  S.   C. 


Cincinnati,   Q. Jmie  6 


-19- 


«mount  ol  C.  0.  0.   $.91jl0?_ 
Charge  for  Collecting      "-nu. 
and  return  ol  proceeds  $ 

Are  above  charges  to  be   I     TES 
oollected  from  consignee  {••^Ift- 

Onless  otherwise  instructed,  desti- 
nation ollice  will  so  collecL 


POSTMASTER--Please  forward  to  address  on  reverse  side 
SHIPPERS  SPECIAL  INSTRUCTIONS 


AGENT— Agent  at  ehippioff  point  must  eee  that  shippers  name  and  addreaa  are  plainly  written  or  prInUd  on  the 
:de  and   Agent  at  destination  muet  pass  pen  lisfhtly  throogh  name  of  coneigTiee  before  maillnff  proceeds  In 

nvclope.    Examine  invoice  encloped  and  follow  any  epeciaj  initructione  of  shipper  thereon  or  in  this  envelope 
conflict  vritb  the  Company'e  rules. 


Illustration  No.  86,  Both  Sides  of  C.  O.  D.  Express  Envelope. 


y     UHlfEOSTJUSWAlL 
/    15  C.O.D.  PARCEL  NUMBER 

No.    2355                       J 
U.  S.  Maii-C.O.D.  Parcel                '• 

,  .„              CPo.lma.l.  ol) 

/  ^A        (Deliiei)  Office) 

Number  of  Moner  Order 

(Postmark  of) 
(MAILING  OFFICE) 

IPestm 
u             'fMAILINO 

OFFICE) 

Date  of  Issue 

Parcel  Oehvcred  br 

I     W     j           „        SEND 

V         .         /               PoBlmsslor  at  dell 

ER  will  FILL  IN  • 

)«c«.  aeLOW 

— 

V'til 

1 

s 
: 

i 

s 
1 

^--^          CHARGES 

ju*^             (teStndsr  bf  il.O.) 

5sil    From     C.    -,7. 

S      57    1 89 

\  0.  FEE 

/  See  Schedule  el  \ 
\  Fees  es  ■•:>        . 

■~'^ 

ill 

liffli 

Keeland  5; 

Co. 

"^ll   fn'ltj:     208  Comir.erce  St. 

\Z%%    T^'ir      Cincinnati 

_  IS Ohio 

""'■^fl    Tn        J.    H.    i;oble 

\     "^'^    l^^S,           1175  Elm  St. 

\          ar      Canton 

ui.i  Ohio 

^^ • — — 

"• 

Recelfed  the  parcel  descfibed  on  Ihe  (roni  ol  this  lag  In  good  condilioa 

o> 

(  Person  receiving  parcel  and  signing  to 

3Cmedi;le  of  »«.  a  fe 

For  Orders  From  «  0  01  to  S   ISO 
From  »  ISl  to  S    5.00 

From  110 01  to  S  MOO       . 
From  Sai.OI  to  8  ilOOO 
Fr.im  tlO  01  to  S  U  00 

From  S5O0I  to  S  6U.0O 
Frnm  »)  01  to  S  75  00 
From  >75.0I  to  >10O.in 

-Si 

"..'.  Scents. 

!!!  lOret.ts. 
'.'.'!.'l5cei.l5. 
.!..  ZOcrot.. 
iiZnO  ceuis. 

Illustration  No.  87,  Both  Sides  of  Tag  for  C.  O.  D.  Parcel  Post  Shipment. 


202  GENERAL  INFORMATION 

package.  This  ticket  shows  the  amount  to  be  collected  before  delivery  is  made. 
When  the  merchandise  arrives  at  its  destination,  the  postmaster  at  that  point  will 
not  deliver  it  until  the  consignee  pays  the  amount  mentioned  on  the  ticket.  When 
the  consignee  pays  for  the  merchandise,  the  postmaster  will  send  the  shipper  a 
post-office  money  order  for  the  amount  of  the  sale. 

§  188.  Method  of  Recording  C.  O.  D.  Shipments.  When  the  terms  are 
C.  O.  D.,  the  sale  is  recorded  in  the  sales  journal  in  the  same  manner  as  a  sale  on 
account.  The  amount  of  the  sale  may  be  debited  to  the  account  with  the  customer 
or  to  a  "C.  O.  D.  Shipments"  account,-  Since  "C.  O.  D."  applies  to  the  terms  of 
payment  in  the  same  manner  as  "3/10,  n/30"  applies  to  the  terms  of  payment,  it 
is  the  better  practice,  especially  where  the  sales  are  made  to  regular  customers,  to 
record  the  amount  of  the  sale  in  the  account  with  the  customer.  When  this  plan 
is  followed,  it  is  necessary  to  keep  a  supplementary  record  of  the  C.  O.  D.  shipments 
so  that  the  bookkeeper  may  know  at  all  times  that  the  proper  attention  has  been 
given  to  each  shipment.  When  the  value  of  C.  O.  D.  shipments  is  recorded  in  an 
account  with  "C.  O.  D.  Shipments,"  the  name  of  the  customer  is  written  in  the 
explanation  column  on  the  debit  side  of  this  account;  when  remittance  is  received 
for  the  shipment,  the  entry  is  made  on  the  same  line  on  the  credit  side.  Where  an 
account  is  kept  with  C.  O.  D.  Shipments,  it  is  best  to  have  separate  accounts  with 
those  made  by  freight,  express,  and  parcel  post,  in  which  case  the  captions  of  the 
accounts  may  be  "C.  O.  D.  Freight  Shipments,"  "C.  O.  D.  Express  Shipments," 
and  "C.  O.  D.  Parcel  Post  Shipments;"  the  caption  may  be  the  name  of  the  rail- 
road company,  the  local  express  company,  or  the  post  office, 

§  189.  How  to  Correct  Errors.  Errors  in  recording  transactions  in  a  book 
of  original  entry  or  in  posting  should  not  be  made,  but  when  they  occur,  must 
be  corrected.  Errors  in  recording  transactions  in  a  book  of  original  entry  should 
be  corrected  by  an  entry  in  the  general  journal;  errors  in  posting  may  be  corrected 
by  drawing  a  red  line  through  the  figures  only  and  writing  the  correct  amount 
above.     Do  not  erase  in  a  book  of  original  entry. 


§  190.  Arrangement  of  Accounts  in  the  Ledger.  The  accounts  in  the 
ledger  are  arranged  in  the  same  order  as  they  appear  on  the  Balance  Sheet  and 
Statement  of  Profit  and  Loss  to  facilitate  the  preparation  of  these  reports.  This 
arrangement  is  shown  in  the  illustrations  of  the  ledger  in  this  text  and  in  the  outline 
of  accounts  needed  to  record  the  transactions  in  the  practice  sets.  Accounts  with 
customers  should  be  kept  in  an  accounts  receivable  ledger  and  controlled  by  the 
Accounts  Receivable  account  in  the  general  ledger.  Accounts  with  creditors 
should  be  kept  in  the  accounts  payable  ledger  and  controlled  by  the  Accounts 
Payable  account  in  the  general  ledger. 

§  191.  Index  to  the  Ledger.  The  position  of  each  account  in  a  ledger 
should  be  indicated  in  the  index  so  that  the  bookkeeper  may  readily  locate  it. 
The  method  of  indexing  will  depend  entirely  upon  whether  a  loose-leaf  or  bound 
ledger  is  used.  No  matter  which  form  of  ledger  is  used,  the  bookkeeper  should 
indicate  the  location  of  a  new  account  in  the  index  at  the  time  the  account  is 
opened;  otherwise,  he  will  be  sure  to  have  trouble  locating  it  when  the  information 
recorded  in  the  account  is  needed.  The  purpose  of  the  discussion  at  this  time  is 
to  impress  the  student  with  the  importance  of  indexing  at  the  time  accounts  are 
opened  and  not  to  describe  the  various  forms  of  ledgers  in  use. 


EXERCISES  203 

§  192.  Detecting  Errors  in  a  Trial  Balance.  If  the  Trial  Balance  does 
not  balance  it  indicates  an  error  in  (i)  posting,  (2)  additions  or  forwarding  in 
the  books  of  original  entry,  (3)  additions  or  subtractions  in  the  ledger,  (4)  trans- 
ferring the  amounts  from  the  ledger  to  the  Trial  Balance,  or  (5)  addition  of  the 
Trial  Balance.  The  error  can  be  detected  only  by  checking  the  work;  the  process 
of  checking  should  be  the  reverse  of  its  completion — that  is,  (i)  addition  of  the 
Trial  Balance,  (2)  amounts  transferred  from  the  ledger  to  the  Trial  Balance,  (3) 
additions  and  subtractions  in  the  ledger,  (4)  additions  and  forwarding  in  the  books 
of  original  entry,  and  (5)  posting.  The  checking  should  be  indicated  by  check 
marks  similar  to  those  in  the  illustrations  of  the  books  of  original  entry  and  ledger 
for  the  first  month  in  the  Model  Set,  Chapter  VI. 

The  careful  bookkeeper,  before  checking,  will  look  for  an  amount  equal  to  the  error  or  to 
one-half  the  error,  and  ascertain  if  the  amount  is  divisible  by  nine.  Failure  to  post  an  amount 
equal  to  the  error  would  result  in  the  amount  of  the  error.  Posting  an  amount  equal  to  one- 
half  of  the  error,  to  the  wrong  side  of  an  account,  would  result  in  the  amount  of  the  error.  If  the 
amount  of  the  error  is  a  multiple  of  nine  (divisible  by  nine  without  a  remainder),  it  may  indicate  trans- 
posed figures  Any  number  composed  of  two  figures,  the  difference  between  which  is  the  same  as 
the  result  of  dividing  the  error  by  nine,  when  transposed,  will  give  the  amount  of  the  error.  Thus, 
if  the  Trial  Balance  is  out  of  balance  45c,  it  may  indicate  that  an  amount  of  5c  has  been  posted  as 
50c,  i6c  as  61C,  27c  as  72c,  38c  as  83c,  49c  as  94c,  50c  as  5c,  6ic  as  i6c,  72c  as  27c,  83c  as  38c  or  94c 
as  49c.  Forty-five  divided  by  nine  equals  five;  the  difference  between  the  first  and  second  figures 
in  each  amount  in  the  preceding  sentence  is  five. 

Exercise  No.  75,  Recording  Transactions  Involving  Merchandise  Discount. 

The  following  transactions  relative  to  purchases  and  sales  of  merchandise 
and  payments  and  receipts  thereon  were  completed  during  the  months  of  April 
and  May.  Record  these  transactions  in  journal  form  (on  a  sheet  of  journal  paper), 
post  to  the  ledger  and  take  a  Trial  Balance. 

April    I.     Bought  from  the  L.   H.   Mabley  Mfg.   Co.,  Kalamazoo,  merchandise 
per  purchases  invoice  dated  March  25,  $162.95;    terms,  3 /lo,  n /30. 

3.  Sold  M.   D.  Puterbaugh,  City,  merchandise  per  sales  invoice  of  this 

date,  $429.86;  terms  4/10,  n/30. 

4.  Sent  the  L.  H.  Mabley  Mfg.  Co.,  check  for  purchases  invoice  of  March 

25,  less  discount. 
10.     Bought  from  the  Union  Mfg.  Co.,  Chicago,  merchandise  per  purchases 
invoice  dated  April  7,  $529.48;    terms,  3/30,  n/60. 

13.  Received  a  check  from  M.  D.  Puterbaugh  for  $200.00  to  apply  on  sales 

invoice  of  April  3. 

30.  Bought  from  Anderson  &    Mumford,    Crawfordsville,    merchandise   per 

purchases  invoice  dated  April  28,  $1,642.87;    terms,  5/10,  3/30,  n/60. 
May    4.     Sold  Charles  Crawford,  City,  merchandise  per  sales  invoice  of  this  date, 
$629.52;  terms,  3/10,  2/30,  n/90. 

5.  Sent  the  Union  Mfg.  Co.,  check  in  full  for  invoice  of  April  7. 

6.  Sent  Anderson  &  Mumford  check  for  $800.00  to  apply  on  purchases 

invoice  dated  April  28. 
10.     Sold  Wilbur  York,  City,  merchandise  per  sales  invoice  of  this  date, 
$1,263.48;    terms.  May  20 — 2/10,   1/30,  n/60. 

14.  Received  a  check  from  Charles  Crawford  for  $200.00  to  apply  on  sales 

invoice  of  May  4. 

25.  Bought  from  Davis  Bros.,  Akron,  merchandise  per  purchases  invoice 

dated  May  20,  $2,992.50;    terms,  4/10,  2/30,  n/90. 

26,  Sent  Anderson  &  Mumford  a  check  for  $776.74  in  full  of  account. 

28.     Sent  Davis  Bros,  a  check  for  $1,000.00  to  apply  on  purchases  invoice 
dated  May  20. 

31.  Received  check  for  $150.00  from  Charles  Crawford  to  apply  on  sales 

invoice  of  May  4. 


204  QUESTIONS 

Exercise  No.  76,  C.  O.  D.  Freight  Shipment. 

December  lo  the  Whitaker  Paper  Company  received  an  order  from  Marsh 
Bros,  of  Atlanta  for  five  dozen  boxes  of  Christmas  stationery  to  be  shipped  by 
freight,  with  instructions  to  rush  the  shipment  and  send  C.  O.  D.  unless  it  was 
desired  to  extend  credit.  The  Whitaker  Paper  Company  had  had  no  previous 
dealings  with  Marsh  Bros.,  and  as  it  was  a  rush  order,  they  sent  it  C.  O.  D.  The 
sale  was  entered  on  December  ii  as  sales  invoice  No.  36475,  total  $82.50,  the 
price  being  $16.50  per  dozen.  The  draft  and  bill  of  lading  were  sent  to  the  Atlanta 
National  Bank  for  collection. 

Prepare  (a)  the  sales  invoice;  (b)  the  original  bill  of  lading;  (c)  the  draft 
payable  at  the  Atlanta  National  Bank;'  and  (d)  show  the  marking  on  the  case. 
Use  blank  paper  ruled  similar  to  Illustrations  Nos.  50,  68,  and  84  unless  blank 
forms  are  available;   the  original  only  of  the  bill  of  lading  need  be  prepared. 

Exercise  No.  77,  Arrangement  of  Accounts. 

Arrange  the  following  accounts  in  the  order  in  which  they  should  appear  in 
the  ledger  as  explained  in   §§  164  and  190. 

J.  W.  Macon,  Capital  Notes  Payable  Selling  Expense 

Office  Equipment  Purchases  Discount  Interest  Earned 

Interest  Cost  Cash  _  Inventory 

Reserve  for  Depreciation  of        Delivery  Equipment  Notes  Receivable 

Delivery  Equipment  Sales  Returns  J.  B.  Hill,  Capital 

Accounts  Receivable  Freight  In  Sales  Allowances 

J.  W.  Macon,  Personal  J.  B.  Hill,  Personal  Purchases  Returns 

Administrative  Expense  Purchases  and  Allowances 

Sales  Sales  Discount  Reserve  for  Depreciation  of 

Reserve    for    Doubtful  Accounts  Payable  Office  Equipment 


Accounts 


QUESTIONS 


1.  What  is  the  least  amount  that  will  be  required  to  pay  an  invoice  of  $1,651.75, 

terms  3/10,  2/30,  n/6o? 

2.  What  is  the  amount  of  the  debit  for  a  payment  of  $362.50  on  an  invoice, 

terms  3/10,  n/60,  the  payment  being  made  within  ten  days  from  the  date 
of  the  invoice? 

3.  (a)  What  is  the  due  date  of  an  invoice  with  the  terms  Feb.  i,  1922,  3  /lo,  n  /60? 

(b)  When  should  check  be  sent  in  payment  of  this  invoice  in  order  to  secure 
the  discount? 

4.  Why  is  it  advisable  for  the  drawer  of  a  draft  to  make  it  payable  at  the  bank 

where  the  drawee  does  business  and  send  it  to  this  bank  for  collection? 

5.  What  procedure  should  John  Smith  of  Chicago  follow  if  he  wishes  to  collect 

a  note  signed  by  Henry  Jones  of  Atlanta,  Georgia,  made  payable  at  the 
Atlanta  National  Bank? 

6.  Why  do  merchants  and  manufacturers  in  New  York  City  require  their  cus- 

tomers to  send  checks  payable  on  New  York  banks  in  payment  for  mer- 
chandise sold  them? 

7.  Why  will  a  bank  in  Dallas,  Texas,  accept  a  check  payable  on  a  bank  in  New 

York  at  its  face  value? 

8.  What  will  be  the  marking  on  a  case  of  merchandise  shipped  by  freight  C. 

O.  D.  to  A.  R.  Dodd,  Hope,  Ark.,  by  Roberts  Bros.,  Decatur,  111.? 

9.  How  does  the  seller  collect  for  a  C.  O.  D.  freight  shipment? 

10.     Why  is  it  advisable  to  arrange  the  accounts  in  the  ledger  in  the  same  order 
as  they  appear  on  the  Balance  Sheet  and  Statement  of  Profit  and  Loss? 


Chapter  XXI 

ACCRUALS  AND  DEFERRED  ITEMS 

The  Purpose  of  this  Chapter  is  to  explain  the  method  of  recording  those 
assets  and  Habihties  which  are  not  shown  by  accounts  at  the  close  of  the  fiscal 
period.  These  are  usually  referred  to  as  accrued  assets,  accrued  liabilities,  deferred 
charges  to  operation,  and  deferred  credits  to  income.  Accrued  assets  result  from 
obligations  owed  to  the  business  on  account  of  income  earned  during  the  current 
fiscal  period  but  not  due  and  payable  until  a  succeeding  fiscal  period.  Accrued 
liabilities  result  from  services  rendered  to  the  business  during  the  current  fiscal 
period  but  not  due  and  payable  until  a  succeeding  period.  Deferred  charges  to 
operation  refer  to  property  or  services  purchased  by  the  business  during  the  cur- 
rent fiscal  period  which  will  not  be  consumed  until  a  succeeding  fiscal  period. 
Deferred  credits  to  income  refer  to  the  income  which  has  been  received  during  the 
current  fiscal  period  but  which  will  not  be  earned  until  a  succeeding  fiscal  period. 

§  193.  Accrued  Interest  Earned  is  an  accrued  asset  resulting  from  accrued 
interest  on  interest-bearing  notes  which  are  not  due  and  payable  until  a  succeeding 
fiscal  period,  and  on  past-due  notes  and  accounts  receivable.  This  may  be  illus- 
trated as  follows:  a  note  for  $900.00,  dated  October  2,  due  in  four  months,  with 
interest  at  6%  from  date,  is  accepted'  from  a  customer  in  payment  of  his  account. 
At  the  close  of  the  fiscal  period,  December  31,  this  note  is  worth  $913.50  (face  of 
note  $900.00,  interest  $13.50).  When  the  Balance  Sheet  is  prepared  on  December 
31,  the  book  value  of  the  note,  as  recorded  in  the  Notes  Receivable  account,  is 
only  $900.00  because  the  interest  has  not  been  recorded,  it  being  customary  not 
to  record  interest  until  collected.  If  the  Balance  Sheet  is  to  show  the  true  value  of 
the  assets  belonging  to  the  business  and  the  true  proprietorship  of  the  business, 
it  will  be  necessary  to  record  the  $13.50  interest  and  to  show  it  on  the  Balance 
Sheet  as  a  part  of  the  assets.  Interest  accrued  on  notes  receivable  and  accounts 
receivable  is  recorded  at  the  close  of  the  period  in  an  account  with  Accrued  Interest 
Earned. 

ACCRUED  INTEREST  EARNED  ACCOUNT 

§  194.  The  Purpose  of  this  Account  is  to  show  the  asset  resulting  from 
accrued  interest  on  notes  receivable  and  accounts  receivable.  This  account  is 
opened  only  at  the  close  of  the  fiscal  period. 

Debit  the  Accrued  Interest  Credit  the  Accrued  Interest 

Earned  Account:  Earned  Account: 

^  I.     At  the  close  of  each  fiscal  period,  ^[  2.     After  the  ledger  is  closed,  for  the 

for    the    amount    of    accrued  amount  shown   on   the  debit 

interest    on    notes    receivable  side;    or   for   the   amount   of 

and  accounts  receivable.  accrued     interest    when     col- 
lected in  the  next  fiscal  period. 

H  3.  The  Balance  of  the  Accrued  Interest  Earned  Account  shows  the  amount 
due  the  business  for  interest  which  has  not  been  collected;  it  is  one  of  the  current 
assets  of  the  business  and  is  shown  as  such  on  the  Balance  Sheet  (111.  No.  92). 

205 


2o6 


ACCRUALS  AND  DEFERRED  ITEMS 


§  195.  Entry  to  Record  Accrued  Interest  Earned.  As  explained  in  the 
preceding  discussion,  the  amount  of  the  accrued  interest  earned  should  be  shown 
on  the  Balance  Sheet  in  order  to  show  the  true  assets  and  true  proprietorship  of 
the  business.  Since  the  facts  shown  on  the  Balance  Sheet  should  also  be  recorded 
in  accounts  on  the  ledger,  it  is  necessary  to  record  the  amount  of  the  accrued  in- 
terest in  the  general  journal  and  post  it  to  the  proper  account  in  the  ledger;  this 
entry  is  usually  referred  to  as  one  of  the  adjusting  entries  (§46,  1[  4)  because  its 
purpose  is  to  record  in  an  account  the  value  of  an  asset  which  does  not  appear  on 
the  ledger.  Applying  this  to  the  accrued  interest  in  §  193,  the  record  in  the 
general  journal  will  be  as  in  the  illustration  below. 


3 /  /' 


Recording  the  asset  Accrued  Interest  Earned  increases  the  income  from  in- 
terest the  same  as  if  cash  had  been  received,  for  the  interest.  When  this  entry  is 
posted,  the  $13.50  will  appear  as  an  asset  on  the  debit  side  of  the  Accrued  Interest 
Earned  account,  and  as  an  income  on  the  credit  side  of  the  Interest  Earned  account. 

§  196.     Entry  to  Close  the  Accrued   Interest  Earned  Account.     The 

accrued  interest  earned  may  be  allowed  to  remain  in  the  Accrued  Interest  Earned 
account  until  the  interest  is  collected,  or  the  balance  of  this  account  may  be  trans- 
ferred to  the  Interest  Earned  account  by  an  entry  in  the  general  journal  after  the 
ledger  is  closed.  The  latter  practice  is  possibly  the  better  because  it  avoids  the 
necessity  of  separating  accrued  interest  earned  from  interest  earned  when  notes 
or  accounts  affected  by  the  accrued  interest  are  collected  in  a  subsequent  period. 

Referring  to  the  illustration  in  §  195,  if  the  accrued  interest  is  allowed  to 
remain  in  the  Accrued  Interest  Earned  account  until  the  note  is  collected  on  Feb- 
ruary 2,  the  entry,  in  journal  form,  will  be  as  in  the  illustration  below. 


_J^dg^«>5'^-z>«i-«?>^><-^      7^^     /f 


> 


! 

(Lt:z..<:^^A^                                                                                                          ^  /  S- 

1 

y  0  0 

Ai 

ACCRUALS  AND  DEFERRED  ITEMS 


207 


If  the  balance  of  the  Accrued  Interest  Earned  account  is  transferred  to  the 
Interest  Earned  account  after  the  ledger  is  closed,  the  entry  will  be  as  in  the  il- 
lustration below. 


c'^l^ie-c^-^^^^'Z^^i^Te^?^  v^/   /^T' 


/J  c^a\ 


/^J  ^a 


u/c<^^?'-<^c~£^^'^::^y'i'^Ce^'/<.^i^£^  Scz^j^'-t-z-^:-^^^ 


.-^o^^x-^^^n^e^  ^'^^zf^yzS^k^-T'-c^d^  i5a--7'->T-iS't5|[  c 


When  the  note  is  collected  on  February  2,  the  entry,  in  journal  form,  will  be 
as  in  the  illustration  below. 


rr  ^f^ 


y7iii-^€e^  /C€^<:.^'-(^'Z^-rpc-'--<^^ 


/  n 


A  comparison  of  the  Interest  Earned  account  after  each  entry  is  posted,  shows 
that  the  final  results  are  the  same.  In  the  first  case,  the  Interest  Earned  account 
is  credited  with  $4.50;  in  the  second  case,  the  Interest  Earned  account  is  debited 
with  $13.50  and  credited  with  $18.00,  showing  a  net  credit  balance  of  $4.50. 

§  197.  Accrued  Wages  is  an  accrued  liability  which  results  when  the  close 
of  the  fiscal  period  occurs  on  a  date  different  from  the  usual  time  of  paying  em- 
ployees. '  This  may  be  illustrated  as  follows:  the  weekly  pay  roll  for  Jenkins 
Bros.,  retail  merchants,  is  $600.00,  payable  at  the  close  of  business  on  Saturday  of 
each  week.  The  end  of  the  fiscal  period  is  on  Wednesday,  December  31.  If  the 
Balance  Sheet  and  Statement  of  Profit  and  Loss  are  to  show  the  true  results,  the 
bookkeeper  will  either  pay  the  employees  on  Wednesday  evening,  or  show  the  $300.00 
due  them  as  a  liability  on  the  Balance  Sheet  and  as  an  increase  to  the  operating 
cost  on  the  Statement  of  Profit  and  Loss.  Since  the  employees  are  not  concerned 
with  the  closing  of  the  books  and  will  not  expect  their  wages  before  the  usual  time, 
it  is  customary  to  show  the  amount  due  the  employees  at  the  close  of  the  fiscal 
period  in  an  account  with  Accrued  Wages. 


ACCRUED  WAGES  ACCOUNT 

§  198.  The  Purpose  of  this  Account  is  to  show  the  amount  due  employees 
at  the  close  of  the  fiscal  period  because  the  end  of  the  fiscal  period  falls  on  a  date 
different  from  that  on  which  the  pay  roll  is  paid.  This  account  is  opened  only  at 
the  close  of  the  fiscal  period. 


208 


ACCRUALS  AND  DEFERRED  ITEMS 


Debit   the   Accrued    Wages   Account:  Credit  the  Accrued    Wages  Account: 

^  I.     After  the  ledger  is  closed  for  the  ^  2.     For  the  amount  due  employees 

amount  shown  on  the  credit  at  the  close  of  the  fiscal  period, 

side;  or  for  the  accrued  wages 
when  paid. 

1[  3.  The  Balance  of  the  Accrued  Wages  Account  shows  the  amount  due 
employees  at  the  close  of  the  fiscal  period;  it  is  a  current  liability  and  is  shown  as 
such  on  the  Balance  Sheet  (Illustration  No.  92). 

§  199.  The  Entry  to  Record  Accrued  Wages  is  made  in  the  general  journal 
at  the  close  of  the  fiscal  period;  it  is  regarded  as  one  of  the  adjusting  entries  (§  46, 
*\\  4)  because  it  places  in  the  ledger  a  liability  which  has  not  been  recorded.  Re- 
ferring to  the  pay  roll  for  Jenkins  Bros,  mentioned  in  §  197  (assuming  that  $100.00 
is  for  office  employees,  $50.00  for  the  buying  department,  and  $150.00  for  the  selling 
department),  the  entry  in  the  general  journal  necessary  to  record  this  liability  will 
be  as  in  the  illustration  below. 


'^/    /^ 


2-- 


(::^^^*^^^>^>e-«>^?^-.(i..=ii.2^5^'^x.-2S;zXHe--  ^'^^C.^x-eo'Z.,:^.^^^ 


/  a  o 


^  (?  a 


When  this  entry  is  posted,  the  $300.00  will  appear  on  the  credit  side  of  the 
Accrued  Wages  account  and  the  amounts  applicable  to  the  Buying  Expense,  Selling 
Expense,  and  Administrative  Expense  accounts  will  appear  on  the  debit  side  of 
these  accounts;  consequently  the  ledger  will  show  a  liability  and  an  operating 
cost   of   $300.00. 

§  200.  Entry  to  Close  the  Accrued  Wages  Account.  The  Accrued  Wages 
account  may  be  allowed  to  remain  open  until  the  wages  have  been  paid  and  then 
debited  with  the  amount  for  which  it  is  credited,  or  the  balance  may  be  transferred 
to  the  operating  accounts  affected,  after  the  ledger  is  closed.  Since  the  pay  roll 
will  be  paid  in  a  few  days  after  the  books  are  closed,  the  amount  is  usually  allowed 
to  remain  in  the  Accrued  Wages  account  and  this  account  closed  when  the  pay 
roll  is  paid.  Referring  to  the  pay  roll  in  §  197  and  the  entry  in  §  199,  the  required 
entry  on  Saturday,  January  3,  when  the  pay  roll  is  paid,  will  be  as  in  the  illustra- 
tion below. 


j^4«-^?-z-*^ise.-^'*-^    -B  ^    /  '^ 


>- 


0^c^(>'/'^-t-<^^.-^  >^^'y^C'tx-it<^ 


■^ 


300 
/  o  o 


^00 


ACCRUALS  AND  DEFERRED  ITEMS 


209 


When  this  entry  is  posted,  the  Accrued  Wages  account  will  be  in  balance  and 
only  one-half  of  the  pay  roll  for  the  week  will  be  debited  to  the  expense  accounts, 
this  being  that  part  of  the  pay  roll  for  the  week  which  is  applicable  to  the  next 
fiscal  period. 

If  the  Accrued  Wages  account  is  closed  after  the  ledger  is  closed,  the  post- 
closing  entry  necessary  to  transfer  the  balance  of  the  Accrued  Wages  account  to 
the  proper  operating  accounts  will  be  as  in  the  illustration  below. 


,,:,<^;;)Le<:..^<^:^2>j^e<^  J /,  /  f^ 


0^i:^--7<?'h^c^^^'i'-o<^^^7'rz^^^<>z/'-ey 


/  o  o 


When  this  entry  is  posted,  the  Accrued  Wages  account  will  be  in  balance  and 
the  amount  of  the  accrued  wages  applicable  to  each  of  the  expense  accounts 
will  appear  on  the  credit  side  of  that  account.  When  the  pay  roll  is  paid  on  January 
3,  the  entry,  in  journal  form,  will  be  as  in  the  illustration  below. 


J/z:r^^?-7.^t.^c^:^i^?^-^  -^^    /  f^- 


\_..-£^L-^:(<A^ 


/  a  o 
■^00 


-3 


(^00 


When  this  entry  is  posted,  the  full  pay  roll  for  the  week  will  appear  on  the 
debit  side  of  the  expense  accounts  to  which  it  is  applicable,  but  there  will  be  a 
credit  to  each  of  these  accounts  which  makes  the  balance  the  same  as  when  the 
Accrued  Wages  account  is  closed  at  the  time  the  pay  roll  is  paid.  The  student 
should  post  these  entries  and  compare  the  results. 

§  201.  Accrued  Interest  Cost  is  an  accrued  liability  resulting  from  the 
accrued  interest  on  interest-bearing  notes  issued  by  the  business  prior  to  the  close 
of  the  fiscal  period  but  not  due  and  payable  until  a  succeeding  fiscal  period,  and 
on  past-due  notes  and  accounts  payable.  This  may  be  illustrated  as  follows:  De- 
cember I,  the  business  borrows  $5,000.00  from  the  bank  on  its  note,  due  in  ninety 
days,  with  interest  at  6%  from  date.  December  31,  at  the  close  of  the  fiscal  period 
the  amount  of  this  indebtedness  will  have  increased  to  $5,025.00  because  of  the 
accrued  interest.  If  the  Balance  Sheet  is  to  show  the  true  amount  of  the  liabilities 
owed  by  the  business  and  the  true  proprietorship,  it  will  be  necessary  to  record 
the  additional  indebtedness  of  $25.00  and  to  show  it  on  the  Balance  Sheet  as  a 
part  of  the  liabilities.  Interest  accrued  on  notes  payable  and  accounts  payable  is 
recorded  at  the  close  of  the  period  in  an  account  with  Accrued  Interest  Cost. 


210 


ACCRUALS  AND  DEFERRED  ITEMS 


ACCRUED  INTEREST  COST  ACCOUNT 
§  202.     The  Purpose  of  this  Account  is  to  show  the  amount  of  accrued 
interest  owed  by  the  business  at  the  close  of  the  fiscal  period  because  the  notes  to 
which  it  is  appHcable  are  not  due  or  the  accounts  to  which  it  is  applicable  are  past 
due  and  unpaid.    This  account  is  opened  only  at  the  close  of  the  fiscal  period. 


Credit  the  Accrued  Interest  Cost  Acct.: 

*f[  2.     At  the  close  of  each  fiscal  period, 

for    the    amount    of    accrued 

interest  on  notes  payable  and 

accoi^nts  payable. 


Debit  the  Accrued  Interest   Cost  Acct.: 
T[  I.     After  the  ledger  is  closed,  for  the 

amount  shown  on  the  credit 

side;    or   for   the   amount   of 

accrued  interest  when  paid  in 

the  next  fiscal  period. 

^  3.  The  Balance  of  the  Accrued  Interest  Cost  Account  shows  the  amount 
owed  by  the  business  for  interest  which  has  not  been  paid ;  it  is  a  current  liability 
and  is  shown  as  such  on  the  Balance  Sheet  (Illustration  No.  92). 

§  203.  Entry  to  Record  Accrued  Interest  Cost.  At  the  close  of  the 
fiscal  period,  it  is  necessary  to  record  in  the  general  journal  the  amount  of  accrued 
interest  cost.  This  entry  is  usually  referred  to  as  one  of  the  adjusting  entries  (§  46, 
^  4)  because  its  purpose  is  to  record  in  an  account  in  the  ledger  the  amount  of  a 
liability  which  does  not  appear  there.  The  entry  in  the  general  journal  for  the 
accrued  interest  mentioned  in  §  201  will  be  as  in  the  illustration  below. 


<=p<2!^^&^:-^'^><*2-'t^t5-^^ 


^/     /fT^ 


^^OO'f'-Cli.A^if^ 


-'.,'5'-z.<;»-Z-E.!=''-^^!eZ'^;^><5Z-t^-t^/| 


>. 


Recording  the  liability  Accrued  Interest  Cost  increases  the  cost  of  interest 
the  same  as  if  cash  had  been  paid  for  the  interest.  When  this  entry  is  posted,  the 
$25.00  will  appear  as  a  liability  on  the  credit  side  of  the  Accrued  Interest  Cost 
account,  and  as  an  expense  on  the  debit  side  of  the  Interest  Cost  account. 

§  204.  Entry  to  Close  the  Accrued  Interest  Cost  Account.  The  accrued 
interest  cost  may  be  allowed  to  remain  in  the  Accrued  Interest  Cost  account  until 
it  is  paid,  or  the  balance  of  this  account  may  be  transferred  to  the  Interest  Cost 
account  by  an  entry  in  the  general  journal  after  the  ledger  is  closed.  The  latter 
practice  is  possibly  the  better  because  it  avoids  the  necessity  of  separating  accrued 
interest  cost  from  interest  cost  when  notes  or  accounts  affected  by  the  accrued 
interest  are   paid   in   a   subsequent   period. 

Referring  to  the  illustration  in  §  203,  if  the  accrued  interest  is  allowed  to  re- 
main in  the  Accrued  Interest  Cost  account  until  the  note  is  paid  on  March  i,  the 
entry  required  at  that  time,  in  journal  form,  will  be  as  in  the  illustration  below. 


^S*^Y^5Z.-7<-tl--#C-' 


/,  /f7^ 


'-jf'O   7  'Jf 


^  ^''^'0—c:c^''CZ^-^ . 


7' 


ACCRUALS  AND  DEFERRED  ITEMS 


211 


If  the  balance  of  the  Accrued  Interest  Cost  account  is  transferred  to  the 
Interest  Cost  account  after  the  ledger  is  closed,  the  entry  will  be  as  in  the  illus- 
tration below. 


,^/j:.&^c.£^^^^..-i^-e^i^  ^/   /f 


When  the  note  is  paid  on  March  i,  the  entry,  in  journal  form,  will  be  as  in 
the  illustration  below. 


■^^--^^-ri^^^Cx  /     /tf^- 


' -^Z^— 2?>e:Z--i, ' 


7^ 


7' 


A  comparison  of  the  Interest  Cost  account  after  each  entry  is  posted  will 
show  that  the  final  results  are  the  same.  In  the  first  case,  the  Interest  Cost  account 
is  debited  with  $50.00;  in  the  second  case,  the  Interest  Cost  account  is  credited 
with  $25.00  and  debited  with  $75.00,  showing  a  net  debit  balance  of  $50.00. 

§  205.  Deferred  Charges  to  Operations  refer  to  (a)  the  value  of  property 
on  hand  at  the  close  of  the  period  which  was  purchased  for  use  in  the  business 
and  which  will  be  consumed  by  its  use,  and  (b)  operating  cost  paid  in  advance.  _ 

Deferred  charges  applicable  to  material  may  be  illustrated  as  follows:  during 
the  business  year,  ofifice  stationery  and  other  supplies  for  use  in  the  office  have 
been  purchased  as  needed,  and  their  value  debited  to  the  Office  Supplies  account. 
At  the  close  of  the  year,  the  balance  of  the  Office  Supplies  account  will  show  the 
net  value  of  the  supplies  purchased,  but  it  will  not  show  the  value  of  supplies  con- 
sumed and  supplies  on  hand.  Consequently,  it  is  necessary  to  ascertain  the  value 
by  an  inventory  in  the  same  manner  as  the  value  of  merchandise  in  stock  is  ascer- 
tained. The  value  of  the  office  supplies  is  shown  on  the  Balance  Sheet  as  an  asset 
because  it  is  something  of  value  which  will  be  used  in  the  operations  of  the  business 
during  the  next  period. 

Deferred  charges  applicable  to  operating  cost  paid  in  advance  may  be  illus- 
trated as  follows:  July  i,  $100.00  is  paid  as  premium  for  an  insurance  policy 
issued  for  one  year.  At  the  close  of  the  fiscal  period,  December  31,  one-half  the 
value  of  this  premium,  or  $50.00,  remains  as  an  asset  to  the  business  because  the 
policy  does  not  expire  until  June  30  of  the  following  year.  This  asset  must  be 
shown  on  the  Balance  Sheet,  otherwise  the  total  assets  and  proprietorship  will 
not  show  the  true  facts. 

The  asset  referred  to  as  a  deferred  charge  is  recorded  in  an  account,  but  the 
amount  recorded  in  the  account  shows  the  total  cost  and  not  the  value  of  the 


212 


ACCRUALS  AND  DEFERRED  ITEMS 


asset  at  the  close  of  the  fiscal  period.  In  the  case  of  insurance,  the  cost  of  the 
premium  is  debited  to  the  Insurance  account  at  the  time  it  is  paid;  hence  the 
balance  of  this  account  at  the  close  of  the  fiscal  period  includes  the  cost  of  the 
insurance  which  has  expired  and  the  cost  of  the  insurance  which  is  yet  to  expire. 
For  this  reason  the  adjusting  entry  required  to  show  the  value  of  a  deferred  charge 
is  made  by  taking  out  of  the  account  the  value  of  the  property  or  service  which 
has  been  used,  thus  leaving  in  the  account  the  value  of  the  property  or  service 
yet  to  be  consumed.  Insurance  and  Office  Supplies  are  two  accounts  that  require 
adjusting  on  account  of  deferred  charges. 

OFFICE  SUPPLIES  ACCOUNT 

§  206.  The  Purpose  of  this  Account  is  to  show  the  cost  of  material  pur- 
chased for  use  in  the  of^ce  which  will  be  consumed  by  its  use;  this  material  includes 
ofiice  stationery,  pens,  ink,  wastebaskets,  etc.  The  value  of  this  material  on  hand 
at  the  close  of  a  fiscal  period  is  ascertained  by  a  physical  inventory  at  cost,  the 
same  as  the  value  of  merchandise. 


Debit  the  Office  Supplies  Account: 
*\  I.     For  amounts   paid   for  supplies 
to  be  used  in  the  ofiice. 


Credit  the  Office  Supplies  Account: 
1[  2.  (a)  For  any  adjustment  which 
reduces  the  cost  of  ofBce  sup- 
plies as  shown  by  the  debit 
side;  (b)  for  the  value  of 
of^ce  supplies  used — the  diff- 
erence between  the  balance  of 
this  account  and  the  inven- 
tory  of   office   supplies. 

If  3.  The  Balatice  of  the  Office  Supplies  Account,  before  the  value  of  the  sup- 
plies used  has  been  entered  on  the  credit  side,  shows  the  net  cost  of  ofiice  supplies 
purchased;  the  balance  of  this  account  after  the  value  of  the  material  used  has 
been  entered,  shows  the  value  of  ofiice  supplies  on  hand  at  the  close  of  the  fiscal 
period.  This  latter  balance  is  one  of  the  assets  of  the  business  and  is  shown  as 
such   on   the   Balance  Sheet   (Illustration   No.   92). 

Advertising  Material  and  Shipping  Room  Material  are  two  other  accounts  of  the  same  nature 
as  Office  Supplies;  the  former  contains  a  record  of  material  purchased  for  advertising  purposes,  and 
the  latter,  material  for  use  in  packing  the  merchandise  sold. 

§  207.  Entry  to  Adjust  the  Office  Supplies  Account.  After  the  value 
of  the  ofiice  supplies  on  hand  at  the  close  of  the  fiscal  period  has  been  ascertained 
through  an  inventory,  it  is  necessary  to  transfer  to  an  operating  account  the  cost 
of  the  material  used,  which  is  the  difference  between  the  inventory  and  the  bal- 
ance of  the  Ofiice  Supplies  account.  If  the  balance  of  the  Ofiice  Supplies  account 
is  $1,200.00  and  the  inventory  $287.50,  the  cost  of  the  office  supplies  used  is  $912.50; 
the  entry  required  to  transfer  this  to  the  Administrative  Expense  account  will 
be  as  in  the  illustration  below. 


^/,  /f: 


^  /■  7- 

.^r-^ 

f  /    >• 

.:!-o 

ACCRUALS  AND  DEFERRED  ITEMS 


213 


INSURANCE  ACCOUNT 
§  208.  The  Purpose  of  this  Account  is  to  show  a  record  of  the  amount 
paid  for  insurance.  Insurance  is  a  protection  afforded  by  insurance  companies 
against  loss  due  to  fire,  water,  theft,  etc.  This  protection  is  secured  by  the  pay- 
ment of  a  small  fee  to  a  company  organized  for  the  purpose  of  issuing  insurance, 
the  fee  paid  for  the  protection  is  usually  referred  to  as  the  premium,  and  the 
written  contract  of  the  company  agreeing  to  afford  the  protection,  as  the  policy. 
The  premium  is  paid  in  advance,  usually  for  one  year.  The  insured  has  the  priv- 
ilege of  canceling  the  policy  at  any  time,  in  which  case  he  will  receive  a  refund  of 
a  part  of  the  premium  paid.  Each  insurance  policy  should  be  recorded  in  the 
insurance  policy  record  (§  174). 


Hi. 


Debit  the  Insurance  Account: 
For  all  insurance  cost,  which  is 
the  premium  paid   for  insur- 
ance. 


Credit  the  Insurance  Account: 
H  2.  (a)  For  any  adjustments  which 
reduce  the  cost  of  insurance  as 
shown  by  the  debit  side;  (b) 
at  the  close  of  each  fiscal  peri- 
od, for  the  insurance  cost  for 
the  period  as  shown  by  the 
policy    record. 

H  3.  The  Balance  of  the  Insurance  Account,  before  the  entry  for  expired 
insurance  has  been  made,  shows  the  net  cost  of  insurance,  and,  after  the  expired 
insurance  has  been  credited  to  the  account,  the  value  of  the  premiums  on  unex- 
pired insurance.  This  latter  balance  of  the  Insurance  account  is  one  of  the  deferred 
charges  and  is  shown  as  such  on  the  Balance  Sheet  (Illustration  No.  92). 

§  209.  Entry  to  Adjust  the  Insurance  Account.  At  the  close  of  the 
fiscal  period,  it  is  necessary  to  take  out  of  the  Insurance  account  the  value  of  the 
insurance  expired  as  shown  by  the  insurance  policy  record.  The  Insurance  account 
will  be  credited  for  the  value  of  this  expired  insurance  but  the  accounts  debited 
will  depend  on  the  nature  of  the  property  protected  by  the  insurance.  Insurance 
cost  on  office  equipment  is  usually  regarded  as  an  administrative  expense;  in- 
surance cost  on  merchandise,  store  fixtures  and  delivery  equipment,  as  a  selling 
expense;  and  insurance  cost  on  buildings,  as  a  building  expense.  For  this  reason 
it  is  necessary  to  determine  the  value  of  the  expired  insurance  applicable  to  each 
kind  of  property  before  debiting  the  accounts  which  are  to  show  this  cost.  Assum- 
ing that  the  total  cost  of  insurance  is  $450.00  and  the  value  of  the  unexpired  in- 
surance is  $150.00,  the  entry  would  require  a  credit  of  $300.00  to  the  Insurance 
account  and  a  debit  of  $300.00  to  the  operating  accounts  affected.  If  the  expired 
insurance  on  merchandise,  store  fixtures  and  delivery  equipment  is  $240.00,  on 
office  equipment  $20.00,  and  on  buildings  $40.00,  the  entry  will  be  as  in  the  illus- 
tration below. 


<=^0/-^'0<i'^:^>^-i^-<2--7^' 


^/       /  ^7- 


tf^?Z,<S<?7-Z-«--7>.C-^<Si-?-Z-£5^i^l.^^ 


J  a  o 


214  ACCRUALS  AND  DEFERRED  ITEMS 

When  this  entry  is  posted,  the  balance  of  the  Insurance  account  will  show  the 
value  of  the  unexpired  insurance  as  recorded  in  the  insurance  policy  record,  and 
the  operating  cost  due  to  the  expiration  of  insurance  premiums  will  be  recorded 
in  the  proper  expense  accounts.  The  balance  of  the  Insurance  account  will  be 
shown  on  the  Balance  Sheet  as  one  of  the  deferred  charges  to  operations  (Illus- 
tration No.  92). 

§  210.  Deferred  Credits  to  Income  refer  to  income  collected  in  advance, 
all  of  which  has  not  been  earned  at  the  close  of  the  fiscal  period.  This  may  be 
illustrated  as  follows:  Martin  Bros,  own  a  building  at  220  Main  Street  in  which 
their  business  is  operated.  They  rent  one  floor  to  A.  B.  Smith  for  $100.00  per 
month,  payable  in  advance  on  the  15th  of  each  month.  The  income  from  this  rent 
is  credited  to  a  Building  Revenue  account.  At  the  close  of  the  fiscal  period,  De- 
cember 31,  the  Building  Revenue  account  shows  a  credit  of  $100.00,  rent  for  one 
month  in  advance  collected  on  December  15.  However,  only  one-half  of  the  rent  has 
been  earned,  the  other  $50.00  being  applicable  to  the  next  period.  Unless  the 
unearned  rent  is  taken  out  of  the  Building  Revenue  account,  this  account  will 
show  a  profit  of  $50.00  more  than  has- been  earned  during  the  current  fiscal  period. 
It  is  customary  to  record  an  item  of  this  nature  as  a  deferred  credit  to  the  income 
account  w^hich  has  been  credited  with  the  income.  The  caption  of  the  account 
required  to  record  the  value  of  the  unearned  income  from  the  rent  collected  in 
advance  would  be  "Deferred  Credit  to  Building  Revenue." 

DEFERRED  CREDIT  TO  BUILDING  REVENUE  ACCOUNT 

§  211.  The  Purpose  of  this  Account  is  to  show  at  the  close  of  the  fiscal 
period  the  rent  collected  in  advance.  It  is  opened  only  at  the  close  of  the  fiscal 
period. 

Debit  the  Deferred   Credit  to  Building  Credit  the  Deferred  Credit  to  Building 

Revenue  Account:  Revenue  Account: 

^  I.     After  the  ledger  is  closed,  for  the  ^  2.     At  the  close  of  the  fiscal  period, 

amount  shown  on   the  credit  for  that  part  of  the  rent  col- 

side,  lected    in    advance    which    is 

applicable  to  the  next  period. 

^  3.  The  Balance  of  the  Deferred  Credit  to  Building  Revenue  Account  shows 
the  amount  of  rent  that  is  yet  to  be  earned.  It  is  regarded  as  a  liability  and  is 
shown  as  such  on  the  Balance  Sheet,  being  listed  after  the  current  and  fixed  lia- 
bilities. 

§  212.  Entry  to  Open  the  Deferred  Credit  to  Building  Revenue  Ac- 
count. At  the  close  of  the  fiscal  period,  it  is  necessary  to  record  the  amount  of 
rent  collected  but  not  yet  earned  by  the  business.  This  entry  is  referred  to  as  one 
of  the  adjusting  entries  (§  46,  *f[  4)  because  its  purpose  is  to  record  in  an  account 
in  the  ledger  the  value  of  a  liability  which  does  not  appear  there.  The  general 
journal  entry  for  the  rent  collected  in  advance  mentioned  in  §  210,  will  be  as  in 
the  illustration  below. 


cp^C^Z-^-'C^C-'TO'Z.'i^C-^''^ 


J?  /   /  f> 


1!                        ' 

■ 

EXERCISES 


215 


When  this  entry  is  posted,  the  $50.00  will  appear  on  the  credit  side  of  the 
Deferred  Credit  to  Building  Revenue  account  and  on  the  debit  side  of  the  Build- 
ing Revenue  account;  consequently,  the  ledger  will  show  a  liability  of  $50.00  and 
a  debit  to  an  income  account,  of  corresponding  amount. 

§  213.  Entry  to  Close  the  Deferred  Credit  to  Building  Revenue  Ac- 
count. After  the  ledger  is  closed,  it  is  necessary  to  transfer  the  balance  of  the 
Deferred  Credit  to  Building  Revenue  account  to  the  Building  Revenue  account 
in  order  that  the  latter  account  may  show  in  the  next  period  only  the  income  from 
rent  applicable  to  that  period.  Applying  this  entry  to  the  illustration  in  §  212, 
the  record  in  the  general  journal  will  be  as  in  the  illustration  below. 


^ 


7^A-^-y-  J/ 


ZfT- 


\ 
1 

i 

When  this  entry  is  posted,  the  Deferred  Credit  to  Building  Revenue  account 
will  be  in  balance,  and  the  amount  of  rent  collected  in  advance,  applicable  to  the 
next  period,  will  appear  on  the  credit  side  of  the  Building  Revenue  account. 

Exercise  No.  78,  Accruals  and  Deferred  Items. 

At  the  close  of  the  fiscal  period  June  30,  the  accruals  and  deferred  items  to 
be  recorded  on  the  books  of  J.  H.  Kilgour  &  Co.  are  as  follows: 

Interest  accrued  on  notes  receivable $  68.95 

Insurance: 

Payments,  per  Insurance  account: 

On  merchandise,  store  fixtures  and  delivery  equipment 482.65 

On  office  equipment 43-75 

On  building 92.50 

Unexpired,  per  insurance  policy  record: 

On  merchandise,  store  fixtures  and  delivery  equipment 96.60 

On  office  equipment 11-50 

On  building 24.00 

Office  supplies: 

Total  purchased  per  Office  Supplies  account 527.40 

On  hand  per  inventory 192-95 

Interest  accrued  on  notes  payable 25.60 

1.  Make  the  adjusting  entries  (a)  to  record  the  accrued  assets  and  liabilities, 
(b)  to  transfer  the  expired  insurance  to  the  proper  operating  accounts,  and  (c)  to 
transfer  the  value  of  the  office  supplies  used  to  the  proper  operating  account. 

2.  Make  the  post-closing  entries  to  transfer  the  accrued  assets  and  liabilities 
to  the  proper  operating  accounts  after  the  ledger  is  closed,  under  date  of  July  i. 


2i6  QUESTIONS 

Exercise  No.  79,  Accruals  and  Deferred  Items. 

At  the  close  of  the  fiscal  period,  December  31,  the  accruals  and  deferred  items 
to  be  recorded  on  the  books  of  Wenger  &  Hoag  are  as  follows: 

Commission  due  from  others  for  services  rendered $265 .  50 

Insurance : 

Payments,  per  Insurance  account: 

On  merchandise,  store  fixtures,  and  delivery  equipment.  .     500.00 

On  office  equipment 27 .  65 

Unexpired,  per  insurance  policy  record: 

On  merchandise,  store  fixtures,  and  delivery  equipment.  .     235.55 

On  office  equipment 9-45 

Rent  for  month  due  but  not  paid 150.00 

Wages  unpaid : 

Office  employees 33-75 

Employees  in  store 42 .  50 

1.  Make  the  adjusting  entries  (a)  to  record  the  accrued  assets  and  liabilities, 
and  (b)  to  transfer  the  expired  insurance  to  the  proper  operating  accounts. 

2.  Make  the  post-closing  entries  to  transfer  the  accrued  assets  and  liabilities 
to  the  proper  operating  accounts  after  the  ledger  is  closed,  under  date  of  January  i. 

QUESTIONS 

1.  Why  is  it  necessary  to  record  accrued  interest  earned  and  accrued  interest 

cost  at  the  close  of  the  fiscal  period? 

2.  How  would  magazine  subscriptions  collected  in  advance  be  recorded  at  the 

close  of  the  fiscal  period  by  the  bookkeeper  for  the  company  publishing  the 
magazine? 

3.  (a)  If  an  account  is  kept  with  Advertising  Material,  what  will  the  balance 

of  this  account  show  after  the  adjusting  entry  for  advertising  material  in 
stock  has  been  made  at  the  close  of  the  fiscal  period?  (b)  How  will  the 
advertising  material  used  be  shown  on  the  Statement  of  Profit  and  Loss? 
(c)  How  will  the  advertising  material  on  hand  be  shown  on  the  Balance 
Sheet? 

4.  Why  is  it  necessary  to  describe  the  nature  of  the  property  insured  when 

recording  a  policy  in  the  insurance  policy  record? 

5.  If  the  value  of  office  supplies  in  stock,  $250.00,  is  not  taken  into  consider- 

ation when  preparing  the  Balance  Sheet  and  Statement  of  Profit  and  Loss 
how  will  this  affect  the  net  income? 

6.  If  $600.00  is  paid  for  three  months'  rent  in  advance  on  December  i,  how 

will  the  two  months'  prepaid  rent  be  recorded  at  the  close  of  the  fiscal 
period  December  31? 

7.  What  entry  may  be  made  for  accrued  interest  earned  after  the  ledger  is 

closed  ? 

8.  (a)  What  is  the  purpose  of  the  Accrued  Interest  Cost  account?     (b)  W^hat  is 

the  difference  between  this  account  and  the  Accrued  Interest  Earned 
account? 

9.  Is  there  any  difference  between  the  merchandise  in  stock  at  the  close  of  the 

fiscal  period  and  the  office  supplies  and  advertising  material  in  stock,  from 
the  viewpoint  of  one  who  is  using  this  information  as  a  basis  for  making 
a  loan  to  the  business  owning  the  property? 
10.     What  does  the  balance  of  the  Office  Supplies  account  show  (a)  before  the 
inventory  is  recorded  and  (b)  after  the  inventory  is  recorded? 


Chapter  XXII 

ADJUSTING  ENTRIES  AND  REPORTS 

The  Purpose  of  this  Chapter  is  to  present  in  pictorial  form  the  work  re- 
quired of  the  bookkeeper  at  the  close  of  the  fiscal  period.  It  is  a  Model  Set  with 
the  books  of  original  entry  and  accounts  omitted.  The  principles  involved  have 
been  discussed  and  illustrated  in  the  preceding  chapters. 

§  214.  The  Work  Required  at  the  close  of  the  fiscal  period  is  usually 
completed  in  the  following  order: 

1.  Trial  Balance  at  the  end  of  the  month  which  closes  the  fiscal  period. 

2.  Preparation  of  the  list  of  inventories,  accruals  and  reserves. 

3.  Adjusting  entries  in  the  general  journal  for  the  inventories,  accruals  and 

reserves,  and  the  posting  of  these  entries. 

4.  Trial  Balance  after  the  adjusting  entries  have  been  posted. 

5.  Preparation  of  the  Balance  Sheet. 

6.  Preparation  of  the  Statement  of  Profit  and  Loss. 

7.  Recording  and  posting  the  closing  entries. 

8.  Recording  and  posting  the  post-closing  entries. 

9.  Post-closing  Trial  Balance. 

If  desired,  the  Trial  Balance  mentioned  in  paragraph  i  may  be  prepared  on  paper  ruled  with 
eight  money  columns — two  for  the  debits  and  credits  in  the  Trial  Balance;  two  for  the  debit  and 
credit  adjustments;  two  for  assets  and  liabilities;  and  two  for  income  and  costs.  When  this  form 
is  provided,  the  journal  entries  (paragraph  3)  can  be  posted  to  the  Adjustment  columns  and  the 
assets,  liabilities,  costs  and  income  extended  into  the  other  columns.  When  this  plan  is  followed,  the 
Trial  Balance  mentioned  in  paragraph  4  may  be  omitted.  This  method  of  procedure  is  discussed 
under  the  title  "Working  Sheet"  in  a  subsequent  chapter. 

EXPLANATION  OF  ILLUSTRATIONS 

§  215.  The  Trial  Balance  at  the  close  of  the  fiscal  period  in  Illustration 
No.  88  shows  the  accounts  in  the  ledger  of  C.  W.  Keeland  &  Co.  on  December  31, 
1922.  It  is  the  same  form  as  the  Trial  Balance  taken  at  the  close  of  each  of  the 
preceding  eleven  months.  This  Trial  Balance  shows  the  same  facts  as  the  Trial 
Balance  in  Illustration  No.  5  and  the  other  Trial  Balances  illustrated  in  previous 
chapters;  that  is,  all  the  open  accounts  in  the  ledger.  The  only  difference  between 
this  Trial  Balance  and  the  others  illustrated  in  previous  chapters  is  that  the  ledger 
from  which  this  Trial  Balance  was  taken  contains  a  greater  number  of  accounts. 

§  216.  The  List  of  Inventories,  Accruals  and  Reserves  in  Illustration 
No.  89  shows  information  which  is  not  shown  by  accounts  on  the  Trial  Balance, 
Illustration  No.  88.  The  value  of  the  merchandise  in  stock  and  the  office  supplies 
on  hand  was  ascertained  by  a  physical  inventory.  The  amount  of  the  accrued 
interest  on  notes  receivable  and  notes  payable  was  obtained  from  the  interest- 
bearing  notes  not  due  until  the  next  fiscal  period;  these  amounts  can  be  verified 
by  reference  to  the  notes  receivable  book.  Illustration  No.  74,  and  the  notes  payable 
book,  Illustration  No.  75.  The  amount  of  the  expired  and  unexpired  insurance 
was  ascertained  from  the  insurance  policy  record ;  this  can  be  verified  by  reference 
to  Illustration  No.  76.  The  amount  of  accrued  wages  represents  the  wages  due 
employees  in  the  selling  department  for  three  days,  the  fiscal  period  ending  on 
Wednesday  and  pay-day  being  on  Saturday.  The  amount  of  accrued  rent  refers 
to  the  rent  of  the  office  which  is  not  due  until  the  first  of  the  following  month. 
The  percentages  for  reserves  set  up  on  account  of  depreciation  and  loss  on  doubtful 
accounts  were  supplied  by  the  management;  these  conform  to  the  percentages 
permitted  by  the  Collector  of  Internal  Revenue  in  the  preparation  of  the  income 

217 


2l8 


ADJUSTING  ENTRIES  AND  REPORTS 


/  kl-^jz,^^^^ 


1 6'  l<^2^^<^^^'-t;<?*^ 
7 


f 


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Illustration  No.  88,  Trial  Balance  at  the  Close  of  the  Fiscal  Period 

tax  return.  All  the  information  given  in  this  list  is  necessary  in  order  that  a 
Balance  Sheet  and  Statement  of  Profit  and  Loss  may  be  prepared  which  will 
show  the  management  the  true  value  of  the  assets,  liabilities,  and  proprietorship 


ADJUSTING  ENTRIES  AND  REPORTS 


219 


■f7- 


3  >/  r/  ^ 

/ 1>  o 
/  /  33 

¥^>3 


:i'8'^f 


1 


7' 


J/£>-2Si:--<^ -^r?<^<:K^-z-<:-«<>^^^^-s' -^o«z-':^<=T 


3C 


/F 


Illustration  No.  89,  List  of  Inventories,  Accruals  and  Reserves 
of  the  business,  and  the  net  profit  resulting  from  operating  the  business  during 
the  fiscal  period. 

§  217.  The  Adjusting  Entries  required  at  the  close  of  the  fiscal  period 
in  Illustration  No.  90  were  prepared  from  the  list  of  inventories,  accruals  and 
reserves  (Illustration  No.  89).  These  entries  have  been  explained  and  illustrated 
in  preceding  sections.  The  entry  to  record  the  value  of  the  merchandise  in  stock 
at  the  close  of  the  fiscal  period — in  this  case,  the  1922  Inventory — may  be  made 
in  connection  with  closing  the  ledger  or  as  an  adjusting  entry;  the  final  results 
are  the  same,  the  only  difference  being  that,  if  the  inventory  is  recorded  before 
the  Balance  Sheet  and  Statement  of  Profit  and  Loss  are  prepared,  these  reports 
can  be  made  from  the  Trial  Balance  taken  after  the  adjusting  entries  are  posted. 
The  entries  made  in  connection  with  the  deferred  charges  (Office  Supplies  and 
Insurance)  do  not  record  the  value  of  the  office  supplies  in  stock  and  the  unex- 
pired insurance,  but  transfer  from  the  Office  Supplies  account  and  the  Insurance 
account  the  value  of  the  office  supplies  which  have  been  used  and  the  amount  of 
the  expired  insurance.     When  preparing  the  list  of  inventories,  accruals  and  re- 


220 


ADJUSTING  ENTRIES  AND  REPORTS 


<:='Cy^^^£^<i.e.''7^'^^z^c<-^e'-y~  j3  /   /  >^  7- ^ 


■3>/  S^ 


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^  / 


^      ^ 


^  / 


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':::^^'C-:i!^t<k.-7^-e^ 


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/  / 


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Illustration  No.  90,  Adjusting  Entries  for  Inventories,  Accruals  and  Reserves  in  '* 

Illustration  No.  89 


ADJUSTING  ENTRIES  AND  REPORTS 


221 


serves,  it  is  necessary  to  show  the  kind  of  property  to  which  the  expired  insurance 
premiums  are  applicable,  in  order  that  the  adjusting  entry  for  insurance  can  be 
made  without  further  reference  to  the  insurance  policy  record.  One  combined 
entry  is  made  for  the  reserves;  depreciation  on  store  fixtures  and  delivery  equip- 
ment increases  the  selling  expense,  hence  the  debit  to  this  account  includes 
both  reserves. 


^.O'^-t- 


^ct^  ^Sh^l^^ 


<  ,s<J'.-€^C^^y7<^'Z^■^^^s-<^  J*  /  y  ^  >  2- 


/^.Is^%-<^^  (i^<^^5"-i<>^««>5^^-<i^e<^ 


v^ 


Illustration  No.  91,  Trial  Balance  after  the  Adjustin 

No.  90  have  been  Posted 
{Concluded  on  page  222) 


g  Entries  in  Illustration 


222 


ADJUSTING  ENTRIES  AND  REPORTS 


_^y^y-^.:t^L^/3lii'J^:^t^^  J/,  //>->-  ((Z,--^..-t.<^A.c.J^!^ J 


^■^ 


/f 


c;.<_Z-^^^:^^«2t^-*<^^?'Z'^^ 


\  -^J^fJi^J^^i 


Entries  in  Illustration  No. 


Illustration  No.  91,  Trial  Balance  after  the  Adjusting 

90  have  been  Posted — Concluded 
NOTE.     When  the  Working  Sheet  is  used  (§  214),  this  Trial  Balance  is  omitted,  as  the  same 
facts  are  shown  by  the  assets,  liabilities,  costs  and  income  columns. 

§  218.  The  Final  Trial  Balance  (Illustration  No.  91)  was  made  after  the 
adjusting  entries  in  Illustration  No.  90  were  posted  to  the  ledger  from  which  the 
Trial  Balance  (Illustration  No.  88)  was  made.  A  comparison  of  the  final  Trial 
Balance  (Illustration  No.  91)  with  the  Trial  Balance  taken  before  the  adjusting 
entries  were  made  (Illustration  No.  88)  will  show  the  following  changes: 

The  five  reserve  accounts  each  show  an  increased  credit  balance  due  to  the 
additional  reserve  set  up  because  of  the  operations  of  the  business  during  the  past 
year;  the  balance  of  the  Office  Supplies  account  has  changed  because  the  value 
of  the  office  supplies  used  has  been  transferred  to  the  proper  expense  account; 
the  balance  of  the  Insurance  account  has  changed  because  the  value  of  expired 
insurance  has  been  transferred  to  the  proper  expense  accounts;  the  final  Trial 
Balance  shows  three  additional  liabilities,  Accrued  Wages,  Accrued  Rent,  and 
Accrued  Interest  Cost;  the  1922  Inventory  appears  on  the  final  Trial  Balance, 
and  there  is  a  credit  to  Purchases  for  the  same  amount  as  the  1922  inventory 
(both  sides  of  the  Purchases  account  are  shown  because  this  information  is  needed 
in  connection  with  the  preparation  of  the  Statement  of  Profit  and  Loss) ;  Selling 
Expense  shows  an  increased  debit  balance  because  of  the  unpaid  wages,  expired 
insurance,  depreciation,  and  loss  on  doubtful  accounts;  Loss  on  Doubtful  Accounts 
is  a  new  account  because  of  the  reserve  set  up  to  take  care  of  loss  on  doubtful  ac- 
counts; Administrative  Expense  and  Building  Expense  each  show  an  increased  debit 
balance  because  of  the  depreciation,  expired  insurance,  office  supplies  used,  and 
unpaid  rent;  Interest  Earned  shows  an  increased  credit  balance  because  of  the 
accrued  interest  on  notes  receivable;  Interest  Cost  shows  an  increased  debit  bal- 
ance because  of  the  accrued  interest  on  notes  payable. 

The  balance  of  each  account  on  the  final  Trial  Balance,  Illustration  No.  91, 
is  used  in  the  preparation  of  the  Balance  Sheet  or  Statement  of  Profit  and  Loss, 
except  Purchases,  both  sides  of  which  are  needed  in  arriving  at  the  net  cost  of  the 
merchandise  sold;  the  balances  of  the  proprietors'  Capital  accounts  are  not  used 
on  either  the  Balance  Sheet  or  Statement  of  Profit  and  Loss  but  are  needed  in 
connection  with  the  proof  of  these   in    Illustration   No,   94. 

§  219.  The  Balance  Sheet  in  Illustration  No.  92  was  prepared  from  the 
asset,  liability,  and  reserve  accounts  on  the  Trial  Balance,  Illustration  No.  91. 
The  information  in  this  report  is  arranged  in  the  following  order:  (i)  current 
assets,  with  the  proper  deduction  for  the  anticipated  loss  on  doubtful  accounts  as 


ADJUSTING  ENTRIES  AND  REPORTS 


223 


7'JJ'S.  a/ 


^:k^^^A^- 


kSJ-T/ 


/>0  7 


_v7 


vjxr 


/rs/^t? 


i^ffT^  ^a  o  o 


F^^-S" 


Cr 


( ;*C!5Z<?^;^^<^--2^  C<^£<:''-2Z^2^^^:'^-5*Z-f/ / 


'^.■.■€^0'-7'-7<.e^'?-z^^^.'tx.^'i^^L£c^^ 


/  a  o 


7'f7 


^3 


s>- 


/<9'j3>- 


-7^^^ 


'^'^^s'C  (? 


_^c^ 


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/r^^'^'T^ 


Illustration  No.  92,  Balance  Sheet,  "Report"  Form 


224  ADJUSTING  ENTRIES  AND  REPORTS 

represented  by  the  Reserve  for  Doubtful  Accounts  account;  (2)  fixed  assets,  with 
the  proper  reserves  for  depreciation;  (3)  deferred  charges;  (4)  current  liabilities; 
(5)  proprietorship,  showing  the  proprietary  interest  of  each  partner.  The  form  is 
the  same  as  the  Balance  Sheet  for  the  model  set  described  and  illustrated  in  Chapter 
VI,  with  the  exception  of  additional  accounts  which  have  been  explained  in  sub- 
sequent chapters.  Deferred  charges  are  listed  after  fixed  assets  because  their 
value  is  applicable  to  the  business  only  as  a  going  concern,  hence  are  the  least 
available  of  all  the  assets  from  the  standpoint  of  those  who  might  wish  to  extend 
credit  to  the  business.  The  proprietorship  of  each  partner  is  not  the  same  as  that 
shown  by  his  capital  account  on  the  Trial  Balance  because  his  interest  has  been 
increased  through  the  operations  of  the  business;  a  proof  of  the  correctness  of  the 
amount  of  this  increase  is  shown  in  Illustration  No.  94.  As  previously  explained, 
the  purpose  of  the  Balance  Sheet  is  to  show  the  owner  of  the  business  the  assets, 
liabilities,  and  his  proprietorship  in  the  business;  it  is  a  report  and  may  be  prepared 
in  one  of  two  forms,  as  explained  in  Chapter  VII. 

§  220.  The  Statement  of  Profit  and  Loss  in  Illustration  No.  93  was 
prepared  from  the  operating  and  non-operating  income  and  the  operating  and 
non-operating  expense  accounts  in  the  Trial  Balance,  Illustration  No.  91.  The 
information  in  this  report  is  arranged  in  the  following  order:  (i)  gross  sales  (bal- 
ance of»the  Sales  account);  (2)  net  returns  from  sales  (returns  and  allowances 
deducted  from  the  total  sales);  (3)  net  cost  of  merchandise  purchased  (1921 
inventory  plus  debit  side  of  the  Purchases  account  plus  balance  of  the  Freight 
In  account,  less  the  amount  of  the  purchases  returns  and  allowances) ;  (4)  net 
cost  of  merchandise  sold  (net  cost  of  merchandise  purchased  less  the  1922  inventory, 
which  is  the  same  as  the  credit  side  of  the  Purchases  account) ;  (5)  gross  profit  on 
sales  (net  returns  from  sales  less  net  cost  of  merchandise  sold) ;  (6)  operating  cost 
(total  of  the  three  expense  accounts  and  the  Loss  on  Doubtful  Accounts  account) ; 
(7)  net  profit  from  operations  (gross  profit  on  sales  less  total  operating  cost) ;  (8) 
other  income  (Interest  Earned  and  Purchases  Discount) ;  (9)  gross  income  (net 
profit  from  operations  plus  other  income);  (10)  deductions  from  income  (Interest 
Cost  and  Sales  Discount);  (11)  net  income  (gross  income  less  deductions  from 
income);  (12)  distribution  of  the  net  income  (that  part  of  the  profit  which  is  to  be 
credited  to  each  partner's  Capital  account  and  to  his  Personal  account  for  with- 
drawal). The  purpose  of  the  Statement  of  Profit  and  Loss  is  to  show  the  owners 
of  the  business  the  net  profit  resulting  from  the  operations  of  the  business  during 
the  fiscal  period  and  the  various  facts  in  connection  with  this  net  profit  which 
will  be  of  assistance  to  them  in  the  future  operations  of  the  business;  it  is  a  report 
and  may  be  prepared  in  one  of  two  forms,  as  explained  in  Chapter  VII. 

§  221.  The  Proof  in  Illustration  No.  94  shows  that  the  proprietorship  on 
the  Balance  Sheet  (Illustration  No.  92)  and  the  net  profit  on  the  Statement  of  Pro- 
fit and  Loss  (Illustration  No.  93)  are  correct.  This  proof  is  made  for  the  conven- 
ience of  the  bookkeeper  before  the  reports  are  submitted  to  the  management,  but 
need  not  be  submitted  as  a  part  of  the  reports.  The  net  profit  on  the  Statement  of 
Profit  and  Loss,  Illustration  No.  93,  is  $4,394.64.  The  proprietary  interest  of  each 
partner  at  the  beginning  of  the  period  is  $5,000.00,  as  shown  by  the  balance  of 
his  Capital  account  on  the  final  Trial  Balance,  Illustration  No.  91.  The  proprie- 
tary interest  of  each  partner  as  shown  by  the  Balance  Sheet,  Illustration  No.  92, 
is  $7,197.32.  Deducting  the  proprietorship  at  the  beginning  of  the  period  from 
the  proprietorship  at  the  end  of  the  period  shows  the  increase  in  proprietorship; 
in  the  illustration  it  is  $2,197.32  each,  or  $4,394.64,  total.  No  facts  set  forth  by 
the  Balance  Sheet  or  Statement  of  Profit  and  Loss  can  be  accepted  as  correct  until 
this  proof  has  been  made. 

This  proof  is  not  necessary  when  the  Working  Sheet  (§214)  is  prepared  because  the  results 
are  proved  when  the  difference  between  the  assets  and  HabiHties  columns  is  the  same  as  the  difference 
between  the  income  and  costs  columns. 


ADJUSTING  ENTRIES  AND  REPORTS 


225 


'^cs<>7tAa<r^ 


■3//f7'>' 


^SE^-^i^/'^>2-i^^^^*^^?5>«-^-fe5^:.,^^/ 


7^^^f7 


^^^ 


^ 


-''^•'^-J^-cS?^  ^^t:^3!^^  ^J'^'^^-^^^^Z^^^ 


3  7-/^/9 


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^d^SfS'a 


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JS'/^<^<f 


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'Y^yc'^^ 


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/fCSf^ti//. 


//j^4c^ 


Illustration  No.  93,  Statement  of  Profit  and  Loss,  "Report"  Form 


226 


ADJUSTING  ENTRIES  AND  REPORTS 


f^ 


%/ 


7/ 


3->- 


M^'^Aj^ 


Zi.£2-_ 


^^f^C^ 


ji>^Jjf^'4-iA 


Illustration  No.  94,  Proof  of  Net  Profit 


§  222.  The  Closing  Entries  in  Illustration  No.  95  were  prepared  from  the 
Statement  of  Profit  and  Loss,  Illustration  No.  93.  The  purpose  of  these  entries 
is  to  close  all  operating  and  non-operating  income  and  expense  accounts  and  to 
give  each  partner  the  proper  credit  in  his  Capital  and  Personal  accounts  for  his 
share  of  the  profit  for  the  period.  The  process  of  closing  is  the  same  as  that  ex- 
plained in  Chapter  VIII  with  the  exception  of  additional  entries  necessary  because 
of  additional  accounts.  The  first  entry  closes  the  Sales  Returns  and  Sales  Allow- 
ances accounts  into  the  Sales  account;  the  second  entry,  the  1921  Inventory  and 
Freight  In  accounts  into  the  Purchases  account;  and  the  third  entry,  the  Pur- 
chases Returns  and  Allowances  account  into  the  Purchases  account;  these  three 
entries  were  not  needed  in  connection  with  closing  the  ledger  as  discussed  in 
Chapter  VIII.  The  fourth  entry  closes  the  Purchases  account  into  the  Sales 
account;  the  fifth,  the  Sales  account  into  the  Profit  and  Loss  account;  and  the 
sixth,  the  operating  expense  accounts  into  the  Profit  and  Loss  account;  these 
three  entries  are  identical  with  the  second,  third  and  fourth  entries  discussed  in 
Chapter  VI 1 1.  The  seventh  entry  closes  the  non-operating  income  accounts  into 
the  Profit  and  Loss  account,  and  the  eighth,  the  non-operating  expense  accounts 
into  the  Profit  and  Loss  account ;  these  two  entries  were  not  shown  in  the  illustra- 
tion in  Chapter  VIII  because  there  were  no  non -operating  incomes  and  no  non- 
operating  expenses.  The  ninth  entry  closes  the  Profit  and  Loss  account  into  the 
proprietors'  Capital  and  Personal  accounts;  this  corresponds  to  the  fifth  entry  in 
Chapter  VIII,  the  only  difference  being  in  the  distribution  of  the  net  profit.  The 
entry  to  place  the  value  of  the  closing  inventory — in  this  case,  the  1922  Inventory — 
on  the  ledger  was  made  as  an  adjusting  entry  (Illustration  No.  90)  instead  of  as  a 
closing  entry  as  in  Chapter  VIII  (see  note  in  §  57).  A  comparison  of  the  discussion 
at  this  time  with  that  given  in  Chapter  VIII  is  made  that  the  student  may  see  that 
the  method  of  closing  is  the  same,  the  changes  being  due  to  the  additional  accounts 
and  not  to  a  change  in  the  method  of  procedure.    After  the  closing  journal  entries 

{Concluded  on  page  228.) 

The  journal  entry  method  of  closing  the  ledger,  as  shown  in  Illustration  No.  95,  is  preferable 
because  it  provides  in  a  book  of  original  entry  a  record  of  each  entry  in  the  ledger  and  thus  facilitates 
auditing.  However,  if  desired,  the  closing  entries  may  be  made  direct  in  the  ledger;  this  plan  is  ex- 
plained in  Appendix  B. 


ADJUSTING  ENTRIES  AND  REPORTS 


227 


>VS^'. 


^  / 


fj/y^S' 


3   / 


y/^rf7 


^  / 


y^-r^f/r 


/J 


S/c. 


yt^fo 


^>^ 


y<^fc 


■^ZO 


jC 


Cs'jf^ 


Illustration  No.  95,  Journal  Entries  to  Close  the  Ledger — Continued 


228 


ADJUSTING  ENTRIES  AND  REPORTS 


--^ 


>0 
// 
// 


tji«^^'Z^2^^5><t2«^^  C-^^-^^V^ 


'/n<79Z^ 


-^.    / 


/^y 


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4^3'^V^-^ 


/  (P^ 


^^y. 


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Illustration  No.  95,  Journal  Entries  to  Close  the  Ledger — Concluded. 

{Continued  from  page  226.) 

have  been  posted  to  the  accounts  in  the  ledger  and  those  accounts  which  are  in 
balance  ruled,  the  operating  and  non-operating  income  and  expense  accounts  will 
be  in  balance  and  the  Capital  and  Personal  accounts  of  each  partner  will  show 
his  proprietary  interest  in  the  business.  The  Capital  accounts  of  the  partner  should 
be  balanced  and  ruled  in  the  same  manner  as  explained  in  Chapter  VTII. 

§  223.  The  Post-Closing  Entries  in  Illustration  No.  96  are  required  to 
close  the  Accrued  Interest  Earned  and  Accrued  Interest  Cost  accounts  into  the 
Interest  Earned  and  Interest  Cost  accounts,  as  explained  in  §§  196  and  204.  The 
Accrued  Rent  and  Accrued  Wages  accounts  are  not  closed  because  these  obligations 
will  be  paid  early  in  the  next  fiscal  period  (§  200)  and  in  one  amount.  When  the 
above  entries  are  posted  the  Accrued  Interest  Earned  and  Accrued  Interest  Cost 
accounts  will  be  in  balance  and  the  interest  resulting  from  these  accruals  will  be 
properly  recorded  in  the  two  accounts  with  interest. 


c'^Ly^^^^'-c.-^^.'^'-^^-z-.'i^-^f^^?^ 


-^/  /fT-'^ 


ii^OCtfr^^ru*'- 


^  / 


1^ 


>\sy 


/  / 


3  J 


yp\3/ 


//jj 


Illustration  No.  96,  Post-Closing  Entries 


ADJUSTING  ENTRIES  AND  REPORTS 


229 


§  224.  The  Post-Closing  Trial  Balance  in  Illustration  No.  97  was  pre- 
pared from  the  ledger  accounts  after  the  entries  in  Illustrations  Nos.  95  and  96 
were  posted.  The  purpose  of  this  Trial  Balance  is  to  prove  that  the  ledger  is  in 
balance  at  the  close  of  the  fiscal  period,  thus  enabling  the  bookkeeper  to  secure  a 
Trial  Balance  at  the  end  of  the  first  month  in  the  next  fiscal  period.  If  the  ledger 
is  out  of  balance  at  the  beginning  of  the  fiscal  period  because  of  errors  in  closing 
or  post-closing  entries,  it  will  remain  out  of  balance  until  the  error  is  discovered 
and  corrected. 


-^/  /^»- 


Hv' 


/a 
// 


^ajs 


'^fa 


>-oM 


3  ao  a 


3  oao 


/ 


/  ^  a.  J  i 


a/ 


'f 


^-i/ 


3^7 


¥^ 


>a\tAo 


4oo\ 


f 


J~aa 


y  f  :>.3 {. 


Illustration  No.  97,  Post-Closing  Trial  Balance 


230  EXERCISE  AND  QUESTIONS 

Exercise  No.  80. 

The  following  list  of  accruals,  deferred  items,  reserves,  and  merchandise  in- 
ventory, December  31,  1922,  is  applicable  to  the  retail  furniture  business,  Exercise 
No.  71,  pages  184-188. 

(a)  Merchandise  in  stock,  $21,265.97. 

(b)  Interest  accrued  on  notes  receivable,  $18.05. 

(c)  Interest  accrued  on  notes  payable,  $1.56.     Unpaid  pay  roll  for  one-half 

week:    office  employees,   $25.00;    selling  department,    $75.00.      De- 
cember garage  rent  unpaid,  $25.00. 

(d)  Office  supplies  on  hand,  $125.07.    Unexpired  insurance:    on  merchandise, 

$111.98;   on  delivery  equipment,  $42.10;   on  building,  $33.42. 

(e)  Reserves   for   Depreciation:     Office   Equipment,   5%;     Delivery   Equip- 

ment, 10%;    Building,  23^%. 

(f)  Reserve  for  Doubtful  Accounts:    34%  of  sales  (credit  balance  of  Sales 

account). 

Follow  instructions  given  below: 

1.  Make  the  adjusting  journal  entries. 

2.  Post  to  the  ledger  sheets  used  in  Exercise  No.  71,  and  take  a  Trial  Balance. 

3.  Prepare  a  Balance  Sheet  and  a  Statement  of  Profit  and  Loss,  both  in 

"report"  form.     (The  profit  is  shared  equally  by  the  partners.) 

4.  Record  in  the  general  journal  the  entries  necessary  to  close  the  ledger. 

5.  Make  the  post-closing  entries,  post  them,  and  take  a  post-closing  Trial 

Balance. 

QUESTIONS 

1.  Is  it  necessary  for  the  bookkeeper  or  accountant  to  prepare  the  Balance 

Sheet  first? 

2.  Why  is  the  Balance  Sheet  usually  prepared  first  and  the  Statement  of  Profit 

and  Loss  second? 

3.  What  information  does  the  management  of  the  business  obtain  from  (a)  the 

Balance  Sheet  and  (b)  the  Statement  of  Profit  and  Loss? 

4.  Why  is  it  necessary  for  the  net  profit  as  shown  by  the  Statement  of  Profit 

and  Loss  to  be  the  same  as  the  increase  in  capital  as  shown  by  the  Balance 
Sheet? 

5.  What  is  the  distinction  (a)  between  the  adjusting  entries  and  closing  entries 

and  (b)  between  the  closing  entries  and  post-closing  entries? 

6.  Is  it  necessary  to  close  the  ledger  at  the  end  of  the  fiscal  period?     Give  reason 

for  answer. 

7.  If  merchandise  which  cost  $2,000.00  is  inventoried  at  $1,500.00,  what  effect 

will  this  have  on  the  net  profit? 

8.  Why  is  it  customary  when  taking  stock  to  use  the  cost  price  of  merchandise 

instead  of  the  market  price  when  the  latter  is  greater  than  the  former? 

9.  What  effect  would  an  error  in  closing  the  ledger  have  on  the  Trial  Balances 

in  subsequent  periods? 
10.     How  is  the  amount  of  accrued   interest  earned  and  accrued   interest  cost 
obtained? 


Chapter  XXIII 

PARTNERSHIP  PROBLEMS 

The  Purpose  of  this  Chapter  is  to  develop  the  principles  discussed  in  the 
preceding  chapters  by  means  of  problems  requiring  their  application,  and  to  illus- 
trate the  opening,  current,  adjusting,  and  closing  entries  peculiar  to  a  business 
conducted  by  partners;  also  to  give  additional  practice  in  the  preparation  of  the 
Balance  Sheet  and  Statement  of  Profit  and  Loss  for  a  partnership  business.  Each 
problem  is  treated  as  an  exercise  and  numbered  consecutively,  following  the  pre- 
ceding exercises. 

Exercise  No.  81,  Opening  Entries. 

F.  L.  Burke,  R.  S.  Cooke,  and  C.  B.  Summers  form  a  partnership  for  the 
purpose  of  transporting  freight  by  truck.  F.  L.  Burke  and  R.  S.  Cooke  have  been 
operating  independent  lines  but  wish  to  consolidate;  C.  B.  Summers  is  admitted 
as  a  partner  because  of  the  additional  cash  capital  needed  for  the  operation  of  the 
consolidated  lines. 

Mr.  Burke  invests  the  present  assets  of  his  business,  consisting  of  the  following: 
three  trucks,  cost  price  $2,500.00  each;  depreciation  on  trucks,  $750.00;  accounts 
receivable,  $1,251.50;  reserve  for  doubtful  accounts,  $116.40;  notes  receivable, 
$500.00;  check  on  the  First  National  Bank,  $627.65.  The  new  firm  agrees  to  assume 
the  following  liabilities:  accounts  payable,  $327.60;  a  note  for  $1,000.00  payable 
at  the  First  National  Bank;  accrued  interest  on  the  note,  $8.50. 

Mr.  Cooke  invests  the  following  assets:  four  trucks,  cost  price $1,650.00 each; 
depreciation  on  trucks,  $1,320.00;  office  equipment,  $350.00;  depreciation  on 
office  equipment,  $35.00;  accounts  receivable,  $762.50;  reserve  for  doubtful 
accounts,  $84.70;   check  on  the  City  National  Bank,  $1,323.45. 

Mr.  Summers  invests  check  on  the  Atlas  National  Bank,  $7,500.00. 

Prepare  in  journal  form,  under  date  of  July  i,  the  entries  necessary  to  open 
the  books  of  the  new  partnership.  Debit  an  account  with  Trucks  with  the  present 
value  of  the  trucks  invested. 

Exercise  No.  82,  Opening  Entries. 

W.  H.  Rankin  and  Chas.  O.  Watkins  form  a  partnership  for  the  purpose  of 
engaging  in  the  retail  shoe  business.  Mr.  Rankin  invests  his  present  stock  of 
goods,  valued  at  $2,684.73;  personal  accounts  due  him,  $1,274.28,  less  2%  for 
bad  debts;  a  note  due  him  for  $375.60;  accrued  interest  on  this,  $3.76;  office 
equipment,  cost  value,  $447.65;  depreciation  on  the  same,  $44.77;  store  fixtures 
$650.00;  depreciation  on  the  same,  $65.00;  cash  in  bank  to  his  credit,  $1,428.65; 
he  owes  personal  accounts,  $2,176.48;    and  a  note  for  $1,000.00. 

Mr.  Watkins  invests  cash,  $2,000.00;  a  note  in  his  favor,  $1,500.00;  and 
accrued  interest  on  this  note,  $27.65. 

Prepare  in  journal  form,  under  date  of  February  i,  the  entries  required  to 
record  the  investment  of  the  partners. 

231 


232  PARTNERSHIP  PROBLEMS 

Exercise  No.  83,  Opening  Entries. 

W.  H.  Armstrong  and  C.  L.  Whittle  form  a  partnership  for  the  purpose  of 
engaging  in  the  retail  hardware  business.  Mr.  Armstrong  invests  cash  in  the 
bank,  $387.62;  merchandise  in  stock,  $2,438.26;  personal  accounts  due  him, 
$972.40;  reserve  for  bad  debts,  2%;  office  equipment,  cost  value,  $350.00;  de- 
preciation on  the  same,  $35.00;  store  fixtures,  $475.00;  depreciation  on  the  same, 
$47.50;  notes  receivable,  $675.27;  accrued  interest  on  the  same,  $36.20.  The 
partnership  assumes  personal  accounts  which  he  owes,  $942.76;  a  note  due  the 
First  National  Bank  for  $1,000.00;  accrued  interest  on  this,  $20.00.  Mr.  Whittle 
invests  cash,  $1,427.86;  merchandise  in  stock,  $1,360.48;  personal  accounts  due 
him,  $843.65,  less  2%  for  bad  debts;  delivery  equipment,  cost  value,  $850.00; 
depreciation  on  the  same,  $85.00;  notes  receivable  due  him,  $1,265.74;  accrued 
interest  on  the  same,  $82.75.  The  partnership  assumes  personal  accounts  which 
he  owes,  $365.40;   a  note  due  the  City  National  Bank,  $500.00. 

Prepare  in  journal  form,  under  date  of  October  i,  the  entries  required  to 
record  the  investment  of  the  partners. 

Exercise  No.  84,  Transactions  Affecting  Partners'  Capital  Accounts. 

1.  Record  direct  in  the  capital  accounts  the  following  transactions  relating 
to  the  investments  and  withdrawals  of  L.  B.  Audigier,  M.  B.  Grifhn  and  C.  B. 
Carter,  in  the  real  estate  business: 

Jan.      I.     Each  partner  invested    $3,000.00;    28,    L.    B.   Audigier   withdrew 

$500.00. 
Feb.     6.     M.  B.  Griffin  invested  $1,200.00;  24,  C.  B.  Carter  invested  $1,500.00. 
Mar.    I.     L.B.  Audigier  invested  $2,500.00;  8,  M.  B.  Griffin  invested  $1,500.00; 

12,  C.  B.  Carter  withdrew  $1,265.28;    16,  M.  B.  Griffin  invested 

$1,582.75;    31,  L.  B.  Audigier  withdrew  $827.40. 
Apr.   15.     The  firm  accepted  real  estate  belonging  to  L.  B.  Audiger,  valued 

at  $1,182.65;     22,  M.   B.   Griffin   withdrew  $1,265.91. 
July     I.     L.  B.  Audigier  withdrew  $500.00. 
Aug.     I.     M.  B.  Griffin  withdrew  $1,342.86;    16,    L.    B.    Audigier    invested 

$1,598.76;  12,  M.  B.  Griffin  invested  $1,800.00. 
Sept.    I.     C.  B.  Carter  invested  $2,500.00;  29,  C.  B.  Carter  withdrew  $1,500.00. 
Oct.      5.     M.  B.  Griffin  withdrew  $850.00;    31,  L.    B.  Audigier    withdrew 

$1,000.00. 
Nov.    5.     M.  B.  Griffin  invested  $1,200.00;   9,  C.  B.  Carter  invested  $1,000.00; 

22,  L.  B.  Audigier  invested  $1,250.00. 
Dec.     I.     C.  B.  Carter  withdrew  $250.00. 

2.  December  31,  the  net  profit,  as  shown  by  the  Statement  of  Profit  and 
Loss,  was  $4,500.00.  Make  the  entry  to  transfer  this  to  their  capital  accounts, 
assuming  that  profits  are  to  be  shared  equally. 

3.  January  i  of  the  following  year,  the  business  was  sold  for  $24,000.00. 
Show  the  division  of  this  cash  between  the  partners  according  to  each  partner's 
net  investment. 

Exercise  No.  85,  Consolidation  of  Two  Partnerships. 

E.  F.  Penn  and  G.  W.  Penn  are  partners  operating  a  retail  grocery  business 
in  one  locality,  and  F.  V.  Knight  and  H.  O.  Powell  are  partners  operating  the  same 
line  of  business  in  another  locality.    It  is  agreed  to  form  a  partnership,  consolidating 


PARTNERSHIP  PROBLEMS 


233 


the  two  businesses.  Each  partner  is  to  invest  $5,000.00  and  share  equally  in  the 
profits  of  the  new  business.  The  Trial  Balance  taken  from  the  ledgers  of  the  two 
concerns  after  the  books  were  closed  April  30,   192.  .,  are  as  follows: 

PENN  BROS.   Post-Closing  Trial  Balance,  April  30,  192.. 


Cash 

Notes  Receivable 

Accounts  Receivable 

Reserve  for  Bad  Debts 

Merchandise  Inventory 

Accrued  Interest  Earned 

Furniture  and  Fixtures 

Reserve  for  Depreciation  of  Furniture  and  Fixtures. 

Buildings 

Reserve  for  Depreciation  of  Buildings 

Land 

Insurance 

Notes  Payable 

Accounts  Payable 

Accrued  Interest  Cost 

Accrued  Wages 

E.  F.  Penn,  Capital. .' 

E.  F.  Penn,  Personal 

G.  W.  Penn,  Capital.  . • 

G.  W.  Penn,  Personal 


308 

42 

321 

40 

1,694 

39 

34 

20 

1.775 

15 

6 

II 

295 

00 

29 

50 

4,000 

00 

200 

00 

2,500 

00 

156 

75 

534 

40 

942 

27 

35 

65 

76 

40 

5,635 

90 

1,014 

35 

5,478 

45 

895 

20 

12,966 

77 

12,966 

TL 

KNIGHT  &  POWELL  Post-Closing  Trial  Balance,  April  30,  192.. 


Cash 

Accounts  Receivable 

Reserve  for  Doubtful  Accounts 

Inventory 

Furniture  an,d  Fixtures 

Reserve  for  Depreciation  of  Furniture  and  Fixtures. 

Delivery  Equipment 

Reserve  for  Depreciation  of  Delivery  Equipment .  .  . 

Insurance 

Office  Supplies 

Notes  Payable 

Accounts  Payable 

Accrued  Interest  Cost 

Accrued  Rent 

F.  V.  Knight,  Capital 

F.  V.  Knight,  Personal 

H.  O.  Powell,  Capital 

H.  O.  Powell,  Personal 


(i)  Prepare  the  journal  entries  to  open  the  books  of  the  new  partnership. 
Debit  the  fixed  asset  accounts  for  their  net  invested  value. 

(2)  Prepare  the  journal  entries  to  close  the  partners'  personal  accounts  into 
their  capital  accounts. 

(3)  Show  in  journal  form  the  entries  necessary  to  record  the  additional  cash 
investment  of  three  of  the  partners  and  the  withdrawal  of  cash  from  investment 
by  one  partner,  in  order  to  make  the  net  investment  of  each  equal  to  $5,000.00, 
the  amount  agreed  upon. 


2,995 

95 

3,748 

16 

75 

29 

4,500 

00 

325 

00 

48 

75 

1,850 

00 

37000 

396 

84 

142 

17 

. 

1,091 

65 

1,543 

70 

65 

47 

175 

00 

4,869 

36 

37 

65 

5,386 

22 

295 

03 

13,958 

12 

13,958 

12 

— 

— 

234 


PARTNERSHIP  PROBLEMS 


Exercise  No.  86,  Admission  of  a  Partner. 

D.  P.  Winters  and  L.  S.  French  are  partners  operating  a  drug  business  under 
the  firm  name  of  Winters  &  French.    They  decide  to  consohdate  with  S.  M.  Smiley 
who  is  operating  a  drug  store  as  an  individual.     The  assets,  liabilities,  and  pro- 
prietorship of  the  partnership  and  of  the  individual  are  shown  below: 
WINTERS  &  FRENCH    Post-Closing  Trial  Balance,  June  30,  192   . 


Cash 

Inventory — Drugs 

Inventory — Merchandise 

Office  Equipment 

Reserve  for  Depreciation  of  Office  Equipment 

Store  Fixtures 

Reserve  for  Depreciation  of  Store  Fixtures 

Soda  Fountain  Equipment, 

Reserve  for  Depreciation  of  Soda  Fountain  Equipment 

Office  Supplies 

Soda  Fountain  Supplies 

Insurance 

Notes  Payable 

Accounts  Payable 

Accrued  Interest  Cost 

Accrued  Rent 

D.  P.  Winters,  Capital 

L.  Si.  French,  Capital 


3,970 

4-051 

1,926 

300 

850 

500 

66 
132 

254 


12,052 


96 


SMILEY'S  PHARMACY  Post-Closing  Trial  Balance,  June  30,  192. 


6,530 

236 

300 

150 

2,349 

2,349 


12,052 


96 


Cash 

Notes  Receivable 

Accounts  Receivable 

Reserve  for  Bad  Debts 

Inventory — Drugs 

Inventory — Merchandise 

Accrued  Interest  Earned 

Store  Fixtures 

Reserve  for  Depreciation  of  Store  Fixtures 

Soda  Fountain  Equipment 

Reserve  for  Depreciation  of  Soda  Fountain  Equipment 

Insurance 

Notes  Payable 

Accounts  Payable 

Accrued  Interest  Cost 

Accrued  Wages 

S.  M.  Smiley,  Capital 


7,424 

256 

1,942 

601 

434 

24 

269 

150 

132 


11,234 


91 


46 


26 


950 
1,296 

3 

22 

8.882 


11,234 


91 


(i)     Prepare  in  journal  form  the  entries  necessary  to  open  the  books  of  the 
new  partnership. 

(2)     Post  these  entries  and  prepare  a  Trial  Balance. 


Exercise  No.  87,  Retirement  of  a  Partner. 

G.  H.  Graton,  T.  R.  RolHns,  and  L.  B.  Bennett  are  operating  a  wholesale 
grocery  business  as  partners.  Mr.  Rollins  wishes  to  retire.  His  capital  account 
at  this  time  shows  a  debit  of  $1,862.55  and  a  credit  of  116,981.50;  his  personal 
account  shows  a  debit  of  $2,652.40  and  a  credit  of  $2,000.00.  He  agrees  to  accept 
in  settlement  for  his  interest  in  the  business  the  following:  cash,  $5,843.50;  a 
note  for  $5,000.00  signed  by  the  new  firm  of  Graton  &  Bennett;  a  note  for  $2,000.00 
held  by  the  firm  and  signed  by  a  customer  (accrued  interest,  $56.50) ;    an  auto- 


PARTNERSHIP  PROBLEMS 


235 


mobile  owned  by  the  firm,  the  cost  of  which  was  debited  to  the  Delivery  Equipment 
account,  $2,000.00  (depreciation,  $400.00);    merchandise  from  stock,  $500.00. 

Prepare,  under  date  of  August  10,  in  journal  form  the  entries  to  close  Mr. 
Rollins'  personal  account  and  to  record  the  agreement;  debit  the  excess  to  a  Loss 
on  Purchase  of  Partner's  Interest  account. 


Exercise  No.  88,  Death  of  a  Partner, 

M.  Abbott,  T.  Bronner,  and  F.  Clayton  were  partners  in  a  retail  farm  imple- 
ments business,  sharing  profits  equally.  December  31  the  books  were  closed. 
March  15  of  the  following  year  Mr.  Abbot  died.  March  17  C.  Breese  was  appointed 
administrator  for  Mr.  Abbott  and  required  a  statement  of  the  business  as  of  March 
15.    The  Trial  Balance  prepared  at  the  close  of  business  on  that  date  was  as  follows: 

ABBOTT,  BRONNER  &  CLAYTON  Trial  Balance,  March  15,  192.. 


Cash 

Notes  Receivable 

Accounts  Receivable 

Reserve  for  Doubtful  Accounts 

Furniture  and  Fixtures 

Reserve  for  Depreciation  of  Furniture  and  Fixtures . 

Insurance 

Office  Supplies 

Advertising  Material 

Notes  Payable 

Accounts  Payable 

M.  Abbott,  Capital 

M.  Abbott,  Personal 

T.  Bronner,  Capital 

F.  Clayton,  Capital 

F.  Clayton,  Personal 

Sales 

Sales  Returns  and  Allowances 

Merchandise  Inventory 

Purchases 

Freight  In 

Purchases  Returns  and  Allowances 

Selling  Expense - 

Administrative  Expense 

Interest  Earned 

Interest  Cost 


333 
696 
562 

21 
950 

25 
962 
630 
412 


244 


230 
i346 
431 

775 

.177 
,868 

398 


65,068 


16 


39 


178 
142 


10,000 
8,562 
5,495 

4-987 

4.643 

361 

30,103 


341 

251 


65,068 


39 


Merchandise  Inventory,  March  15,  192.  .,  $12,594.35. 

Accrued  interest  on  notes  receivable,  $87.95. 

Accrued  interest  on  notes  payable,  $136.62. 

Unpaid  Wages:     selling  department,  $450.00;  office,  $350.00. 

Unpaid  Rent  for  the  month  of  March,  $150.00. 

Insurance  Expired,  $637.84.  One-half  of  expired  insurance  is  on  merchandise  and  one-half  on 
furniture  and  fixtures;  of  the  expired  insurance  on  furniture  and  fi.xtures,  one-fourth  is  appli- 
cable to  administrative  expense  and  three-fourths  to  selling  expense. 

Office  supplies  on  hand  per  inventory,  $125.05. 

Advertising  material  on  hand  per  inventory,  $265.77. 

Depreciation  on  Furniture  and  Fixtures,  $9.90  (yearly  depreciation,  5%  of  cost);  of  this,  one-fourth 
is  applicable  to  administrative  expense  and  three-fourths  to  selling  expense. 

Reserve  for  Doubtful  Accounts,  one-twelfth  of   1%  of  net  sales. 

Prepare  (i)  the  adjusting  entries,  (2)  the  Trial  Balance  from  the  ledger  after 
these  entries  are  posted,  (3)  the  Balance  Sheet,  (4)  the  Statement  of  Profit  and 
Loss,  (5)  the  closing  entries,  (6)  the  post-closing  entries,  and  (7)  the  post-closing 
Trial  Balance  after  these  entries  are  posted. 

April  I  the  administrator  accepted  $6,000.00  cash  in  full  settlement  for  Mr. 
Abbott's  interest  in  the  business.     Record  this  transaction  in  journal  form. 


236  PARTNERSHIP  PROBLEMS 

Exercise  No.  89,  Trial  Balance,  Statements  and  Ledger  Closing. 

On  December  31,  1922,  the  accounts  in  the  ledger  of  T.  B.  Austin  &  Co.  show 
the  following  balances: 

Cash $  8,200 .  00 

Notes  Receivable i  ,480 .  00 

Accounts  Receivable 10,800.00 

Reserve  for  Doubtful  Accounts 430.00 

Furniture  and  Fixtures 800.00 

Res.  for  Dep.  of  Furn.  and  Fix 200.00 

Delivery  Equipment 2,200.00 

Res.  for  Dep.  of  Del.  Equipment.  .  .  .- 660.00 

Buildings 3,000.00 

Res.  for  Dep.  of  Buildings 300.00 

Land 3,500.00 

Insurance 290 .  00 

Office  Supplies 474 .  40 

.    Advertising  Material 756.95 

Notes  Payable 5,000.00 

Accounts  Payable 11,000.00 

T.  B.  Austin,  Capital 16,800.00 

A.  R.  Black,  Capital 16,800.00 

Sales 48,000.00 

192 1  Inventory 3,300.00 

Purchases 49,000 .  00 

Freight  and  Drayage  In 3,450.00 

Buying  Expense 960 .  00 

Selling  Expense 7,500 .  00 

Delivery  Expense 1,240.00 

Administrative  Expense 2,275.00 

Interest  on  Notes  Receivable 58.95 

Discount  on  Purchases 664.00 

Interest  on  Notes  Payable 395- 00 

Discount  on  Sales .- 291 .60 

1.  Prepare  a  Trial  Balance  from  these  account  balances. 

2.  Make  the  adjusting  entries  for  the  following: 

(a)  1922  inventory,  $28,762.95. 

(b)  Accrued  interest  on  notes  receivable,  $25.60. 

(c)  Accrued  interest  on  notes  payable,  $31.80. 

(d)  Unpaid  pay  roll:   office,  $120.00;  selling  department,  $160.00, 

(e)  Expired  insurance:    furniture  and  fixtures,  $16.75;  delivery  equip- 

ment, $24.50;    buildings,  $37.00;    stock  of  merchandise,  $60.95. 

(f)  Supplies    used:     office    supplies,    $395.45;     advertising    material, 

$710.10. 

(g)  Reserves  for  depreciation:    furniture  and  fixtures,  5%;    delivery 

equipment,  6%;   buildings,  2%. 
(h)     Reserve  for  Doubtful  Accounts:    1%  of  accounts  receivable. 

3.  Prepare  a  Balance  Sheet  and  Statement  of  Profit  and  Loss  assuming  that 

the  profit  is  shared  equally  by  the  partners. 

4.  Make  the  entries  to  close  the  ledger. 

5.  Make  the  necessary  post-closing  entries. 

6.  Prepare  a  post-closing  Trial  Balance. 

Exercise  No.  90,  Changing  from  a  Partnership  to  a  Sole  Proprietorship. 

Ammon    and    Banbury   are    partners    operating   a    motion    picture    theater. 
Neither  receives  a  salary,  the  profit  being  shared  equally  at  the  end  of  the  year. 


PARTNERSHIP  PROBLEMS  237 

Ammon  receives  injuries  in  an  automobile  accident  which  necessitate  his  retir- 
ing from  active  management.  Banbury  wishes  to  continue  his  connection  with 
the  theater,  but  does  not  care  to  assume  the  risk  of  management  on  his  own  respon- 
sibihty.  It  is  agreed  that  Ammon  shall  buy  Banbury's  interest  as  shown  in  the 
ledger,  payable  one-half  cash  and  one-half  note,  and  that  he  shall  retain  Banbury 
as  manager  of  the  theater,  giving  him,  in  addition  to  a  monthly  salary  of  $150.00, 
one  fifth  of  the  yearly  profits.  The  partners'  accounts  appear  in  the  ledger  as 
follows:  Ammon,  Capital,  Cr.,  $13,050.00;  Ammon,  Personal,  Dr.,  $550.00; 
Banbury,  Capital,  Cr.,  $11,300.00;  Banbury,  Personal,  Cr.,  $700.00.  Statements 
prepared  December  31,  show  that  the  net  profit  for  the  year  is  $6,800.00. 

I.  Make  the  entries  in  journal  form  (a)  to  transfer  the  net  profit  to  the  part- 
ner's capital  accounts;  (b)  to  close  Banbury's  personal  account  into  his  capital 
account;  (c)  to  record  the  note  and  cash  given  by  Ammon  in  payment  for  Ban- 
bury's interest. 

,  2.  Assuming  that  the  net  profit  the  first  year  after  the  new  agreement  goes 
into  effect  is  $7,000.00,  (a)  record  in  journal  form  the  distribution  of  the  net  profit; 
(b)  compare  the  compensation  received  by  each  under  the  partnership  agreement 
and  under  the  new  agreement,  stating  whether  it  was  more  or  less  under  the  latter 
than  under  the  former. 

Exercise  No.  91,  Accruals  and  Deferred  Items. 

At  the  close  of  the  fiscal  period  April  10,  the  accruals  and  deferred  items  to 
be  recorded  on  the  books  of  Binner  &  Johnson  are  as  follows: 

Interest  accrued  on  notes  receivable $275.60 

Interest  accrued  on  notes  payable 218.65 

Taxes  accrued  (Administrative  Expense) 214.40 

Wages  unpaid : 

Administrative  division  of  the  office 116.50 

Purchasing  division  of  the  office 55-90 

Selling  division  of  the  office 251 .  65 

Sales  clerks  in  store 310.00 

Drivers  of  delivery  trucks 125 .  60 

Rent  for  month  paid  in  advance  April  i 150.00 

Insurance: 

Payments,  per  Insurance  account: 

On  merchandise 865 .  40 

On  delivery  equipment 352 .  50 

On  building 250.00 

Unexpired,  per  insurance  policy  record: 

On  merchandise 207 .  90 

On  delivery  equipment 75-75 

On  building 107 .  50 

Material : 

Office  supplies  purchased  per  Office  Supplies  account 721 .65 

Office  supplies  on  hand  per  inventory 119.60 

Advertising  material  purchased  per  Advertising  Material  acct.     625 .  50 

Advertising  material  on  hand  per  inventory 144.  50 

Total  stamps  purchased  per  Stamps  account 801 .  50 

Stamps  used  in  office 85 .  50 

Stamps  used  in  advertising  department 261 .08 

1.  Make  the  adjusting  entries  (a)  to  record  the  accrued  assets  and  liabilities, 
_(b)  to  record  the  prepaid  rent  in  the  proper  account,  (c)  to  transfer  the  expired 
insurance  to  the  proper  operating  accounts,  and  (d)  to  transfer  the  value  of  material 
used  to  the  proper  operating  accounts. 

2.  Make  the  post-closing  entries  to  transfer  the  accrued  assets  and  liabilities 
and  the  prepaid  expense  in  (a)  and  (b)  above,  to  the  proper  operating  accounts, 
under  date  of  April  11. 


238  QUESTIONS 

QUESTIONS 

1.  (a)  What  account  is  credited  for  that  part  of  the  profit  which  is  to  be  with- 

drawn by  a  partner?  (b)  What  account  is  credited  for  that  part  which  is 
to  be  left  in  the  business? 

2.  Robert  Johnson  invests  $5,000.00  and  withdraws  $1,200.00;    James  Carrel 

invests  $4,000.00  and  withdraws  $800.00.  The  business  is  sold  for  $10,500.00 
cash.  How  much  of  this  cash  will  each  partner  receive,  the  profit  and  cash 
to  be  divided  in  the  same  proportion  as  the  net  investment? 

3.  If  amounts  withdrawn  by  a  partner  as  compensation  for  his  services  are 

debited  direct  to  his  capital  account,  what  effect  will  this  have  on  (a) 
the  operating  cost  of  the  business  and  (b)  on  the  net  profit  of  the  business? 

4.  If  there  are  three  partners  in  a  business  and  one  of  them  sells  his  interest  in 

the  business  to  one  of  the  other  partners  for  cash,  (a)  what  entry  will  be 
required  to  record  this  sale?  (b)  If  he  sells  to  the  other  two  partners  and 
payment  is  made  from  the  assets  of  the  partnership,  what  entry  will  be 
made? 

5.  If  there  are  three  partners  in  a  business  and  one  of  them  (with  the  consent 

of  the  others)  sells  his  interest  for  part  cash  and  part  note  to  a  person  who 
is  not  connected  with  the  firm,  what  entry  will  be  required  to  record  this 
transaction? 

6.  If  a  partnership  business  composed  of  two  partners  has  been  operated  at  a 

loss  of  $4,000.00  during  the  fiscal  period,  and  the  two  partners,  who  share 
this  loss  equally,  each  invests  $1,500.00  cash  and  has  $500.00  debited  to 
his  personal  account  to  cover  this  loss,  what  entry  will  be  made  to  record 
the  transaction? 

7.  If  the  profit  resulting  from  the  operations  of  a  partnership  business  during  a 

fiscal  period  is  $6,000.00  and  the  two  partners  agree  to  withdraw  all  of 
this,  one  of  them  accepting  a  building  and  lot  recorded  on  the  books  of  the 
partnership  as  "Real  Estate,  $2,750.00"  as  his  share  of  the  profit  and  the 
other  accepting  $3,000.00  cash  as  his  share,  how  will  the  transaction  be 
recorded  ? 

8.  One  of  the  partners  is  to  receive  five  per  cent  of  the  total  sales  as  his  com- 

pensation for  services  rendered  the  partnership,  maintaining  his  own  auto- 
mobile for  use  in  calling  on  customers.  At  the  close  of  the  business  year 
the  total  sales  amount  to  $152,000.00,  and  his  drawing  account  shows  a 
debit  balance  of  $4,900.00  for  amounts  withdrawn  on  account  of  commission. 
What  entries  will  be  required  to  record  the  commission  and  the  check  paid 
him  for  the  balance  of  his  commission? 

9.  J.  C.  Strickler  is  one  of  the  partners  in  a  mercantile  business.     At  the  close 

of  the  business  year,  his  personal  account  shows  a  credit  balance  of  $1,400.00 
for  amounts  advanced  to  the  partnership  and  for  salary  during  the  year. 
He  agrees  to  accept  in  settlement  of  this  an  automobile  purchased  by  the 
partnership  at  the  beginning  of  the  previous  fiscal  period  for  $1,850.00 
as  recorded  in  the  Delivery  Equipment  account,  and  depreciated  at  the 
rate  of  ten  per  cent  for  each  fiscal  period.  What  entries  are  necessary  to 
record  this  transaction? 
10.  T.  B.  Bridges  and  L.  W.  Peart  are  partners  in  a  mercantile  business.  At 
the  close  of  the  fiscal  period  Mr.  Bridges'  capital  account  shows  a  credit 
balance  of  $6,752.80  and  Mr.  Peart's  capital  account,  a  credit  balance  of 
$5,522.50.  Mr.  Peart  pays  Mr.  Bridges  $3,500.00  cash  for  one-half  of  his 
interest  in  the  business,  thus  giving  Mr.  Peart  a  three-fourths  interest  and 
Mr.  Bridges  a  one-fourth  interest.  What  entry  is  necessary  to  record  this 
transaction? 


Chapter  XXIV 

CONSIGNMENTS 

The  Purpose  of  this  Chapter  is  to  explain  the  method  of  recording  trans- 
actions affecting  merchandise  received  by  the  business  or  shipped  by  the  business 
on  consignment,  and  to  illustrate,  through  the  practice  set,  some  of  the  transactions 
performed  by  a  commission  business.  While  the  tendency  in  modern  business  is 
to  buy  and  sell,  yet  there  are  many  cases  in  which  it  is  to  the  advantage  of  all 
parties  concerned  to  make  sales  on  consignment. 

§  225.  A  Consignment  is  merchandise  sent  by  the  owner  to  another  to 
be  sold  for  the  owner.  The  owner  of  the  merchandise  sent  as  a  consignment  is 
known  as  the  consignor  and  the  one  to  whom  the  merchandise  is  sent  as  the  con- 
signee. The  consignment  is  at  the  risk  of  the  consignor  and  belongs  to  him  until 
it  is  sold  by  the  consignee. 

The  consignor  consigns  the  merchandise  to  the  consignee;  the  consignee  sells  the  merchandise 
and  pays  the  consignor  for  it.  As  a  rule,  the  report  of  sales  for  each  consignment  is  made  after  all 
merchandise  in  the  consignment  has  been  sold.  The  consignee  may  have  in  his  possession  more 
than  one  consignment  from  the  same  consignor,  but  a  separate  record  is  kept  of  the  sales  of  the  mer- 
chandise in  each  consignment. 

§  226.  The  Relation  of  the  Consignor  and  Consignee  is  that  of  prin- 
cipal and  agent.  The  agent  must  follow  the  instructions  of  the  principal  in  regard 
to  the  sale  of  the  merchandise  which  belongs  to  the  principal;  in  the  absence  of 
any  specific  agreement  in  regard  to  the  method  of  sale,  the  agent  is  supposed  to 
follow  the  trade  custom  of  the  business  in  which  he  is  engaged.  The  agent  should 
keep  the  merchandise  of  his  principal  separate  from  his  own  merchandise  and 
must  take  the  same  care  of  it;  otherwise,  he  will  be  responsible  for  any  damage 
that  may  occur  through  his  negligence. 

§  227.  Compensation  of  Consignee.  The  consignee  receives  a  fee  for 
the  sale  of  merchandise  on  consignment;  this  fee  is  referred  to  as  commission  and 
is  based  on  an  agreed  percentage  of  the  net  sales.  The  commission  is  the  consignee's 
profit,  that  is,  his  income  from  the  services  rendered  in  connection  with  selling 
consigned  goods.  A  profit  will  accrue  to  the  consignor  if  he  receives  from  the 
consignee  a  greater  amount  than  the  cost  of  merchandise  plus  the  cost  of  sales. 

§  228.  Purpose  of  Consignments.  Merchandise  is  consigned  because 
its  nature  is  such  that  the  consignee  does  not  wish  to  purchase  it  or  because  the 
consignor  believes  that  it  will  be  to  his  advantage  to  offer  it  for  sale  on  consignment. 
Live  stock,  cotton,  fruit,  vegetables,  poultry  and  eggs  are  examples  of  the  class 
of  merchandise  sold  on  consignment.  These  examples  illustrate  the  class  of  mer- 
chandise that  may  be  offered  for  sale  on  consignment,  and  are  not  given  to  convey 
the  idea  that  such  merchandise  is  always  sold  in  this  manner.  Trade  customs  and 
market  conditions  govern,  to  a  large  extent,  the  marketing  of  all  classes  of  mer- 
chandise. 

§  229.  Business  Forms  and  Accounts.  The  business  forms  required  in 
connection  with  a  consignment  consist  of  the  "invoice  of  shipment"  and  the  "ac- 
count sales."  The  additional  accounts  necessary  in  connection  with  consignments 
consist  of  Consignment  Out,  Consignment  In,  Commission,  Storage,  and  Drayage. 

§  230.  The  Invoice  of  Shipment  is  the  business  form  used  by  the  con- 
signor on  which  to  list  the  goods  shipped  to  the  consignee  on  consignment.  It  has  the 
same  relation  to  a  consignment  as  the  sales  invoice  has  to  a  sale,  but  differs  in 

239 


240 


CONSIGNMENTS 


that  the  title  to  the  merchandise  shipped  on  consignment  remains  in  the  shipper 
while  the  title  to  merchandise  sold  passes  to  the  purchaser.  Illustration  No.  98 
shows  one  form  of  invoice  of  shipment. 


Invoice  of  Shipment 


Invoice 


Illustration  No.  98,  Invoice  of  Shipment. 

§  231.  The  Account  Sales  is  the  business  form  used  by  the  consignee  for 
reporting  to  the  consignor  the  sales  and  expenses  in  connection  with  the  consign- 
ment.   The  information  shown  in  it  consists  of  the  date,  name  and  address  of  the 


Account  Sales 

riNrixxATi.Oino       OUL    5 

Below  plea^  find  account  sales  of    '2- (^  /i>    (l-'T^-t^ZJ^ft^^    /^'i^&^'/^-^f'—^.-^^ 

19 

Sold  hy^^..i^^^?^,^^i^^'!y-7^ y  V^^^^?^^?^??.^^gZ—       Commission  Merchant 
Received  (/-i-i-'i^^  ^^  19              and  sold  for  account  of  ^'Z-^-!S?-z>;?^-7<-K^/r.-r^-zxV'.-<^ . 

DATE 

CHARGES 

Folio 

AMOUNT 

DATE 

SALES 

Folio 

AMOUNT 

a^j^ 

■y 

Freiiht 

^:? 

-vr 

^^ 

^ 

>- 

-^t}    C^-r>^-aS/:£^  £^   J".  >.^ 

// 

/^T- 

.ro 

JC'^7 

■  -r 

(^^ 

/a 

'K 

,J^           „                 „          AT^S-                 1 

// 

Z^?- 

,ra 

i 

(? 

/  o  (^        „              „       3  -^-a 

^? 

.4>o 

Advances 

y-r 

Storaae 

0-; 

/ty 

Insurance 

,-r 

f' 

^J 

^ 

& 

>/- 

Net  Proceeda 

(fj 

.r// 

rr 

<iA^S 

Ca^J 

- 

Illustration  No.  99,  Account  Sales. 


CONSIGNMENTS  241 

consignee,  name  and  address  of  the  consignor,  date  tiie  consignment  was  received, 
the  various  charges  in  connection  with  the  consignment,  a  description  of  each 
sale  from  the  consignment,  the  total  sales,  and  the  net  amount  due  the  consignor. 
Where  there  are  a  number  of  consignments,  the  consignee  may,  by  the  use  of 
carbon  paper,  prepare  the  account  sales  as  the  debits  and  credits  are  posted. 
Illustration  No.  99  shows  one  form  of  account  sales. 

CONSIGNMENT  OUT  ACCOUNT 

§  232.  The  Purpose  of  this  Account  is  to  sihow  the  consignor's  record 
of  the  transactions  with  the  consignment.  The  title  of  the  account  should  include 
the  term  "consignment"  and  the  name  of  the  consignee,  also  "out"  or  "to"  to 
indicate  the  nature  of  the  account;  thus  "Consignment  Out,  John  Smith  &  Co." 
or  "Consignment  to  John  Snith  &  Co."  indicates  that  merchandise  belonging  to 
the  business  for  which  the  books  are  being  kept  has  been  shipped  to  John  Smith 
&  Co.   to  be  sold  on  consignment. 

Debit  Each  Consignment  Out  Account:  Credit  Each  Consignment  Out  Account: 

^  I.     For   transportation    (a)    prepaid  II  2.     For  the  net  proceeds  of  the  con- 

on  the   consignment,   and   (b)  signment  as  shown  by  the  ac- 

paid  on   merchandise  belong-  count  sales. 

ing    to     the    consignment    re-  Should  the  consignee    send    cash 

turned    by    the    consignee.  or    accept    a    draft    in     part     pay- 

ment of  the  consignment,  such 
part  payments  are  credited  to  the 
consignment  and  deducted  from 
the  net  proceeds. 

%  3.  The  Balance  of  Each  Consignment  Out  Account  shows  the  net  returns 
from  the  sales  of  merchandise  belonging  to  the  (Consignment;  it  is  shown  on  the 
Statement  of  Profit  and  Loss  as  a  return  from  sales. 

If  desired,  the  balance  of  each  Consignment  Out  account  may  be  closed  into  one  account  with 
Consignment  Sales  and  the  balance  of  this  account  shown  on  the  Statement  of  Profit  and  Loss. 
The  purpose  of  consigning  merchandise  is  to  effect  sales,  hence  all  returns  from  these  sales  are  an 
addition  to  the  sales  of  merchandise  from  stock;  the  amount  of  the  consignment  sales  is  shown 
separate  from  sales  out  of  stock  so  that  the  management  may  have  this  additional  information. 

§  233.  Inventory  of  Consignments  Out.  Merchandise  in  the  hands  of 
the  consignee  is  one  of  the  assets  of  the  business  the  same  as  merchandise  in  stock. 
No  account  sales  from  a  consignee  at  the  close  of  a  fiscal  period  indicates  to  the 
consignor  that  the  merchandise  is  still  in  the  possession  of  the  consignee.  The 
value  of  this  merchandise  at  cost  price  should  be  shown  on  the  Balance  Sheet  as 
an  asset  under  the  caption  "Consignment  Goods".  The  value  of  merchandise  on 
consignment  at  the  close  of  the  fiscal  period  does  not  aftect  the  consignment  account 
because  this  account  was  not  debited  with  its  value  when  it  was  shipped. 

The  debits  (cost  of  shipping,  etc.)  to  each  Consignment  Out  account  for  which  there  has  been 
no  report  of  sales  should  be  shown  on  the  Balance  Sheet  in  the  same  manner  as  deferred  charges; 
the  credits  (part  payment  on  account  of  goods  consigned)  to  each  Consignment  Out  account  for 
which  there  has  been  no  report  of  sales,  should  be  shown  on  the  Balance  Sheet  as  a  liability.  Amounts 
paid  for  sending  merchandise  on  consignment  constitute  a  selling  expense,  but  if  no  returns  have 
been  received  on  the  consignment  at  the  close  of  the  fiscal  period,  these  should  not  be  included  as 
a  current  expense,  but  should  be  carried  over  into  the  next  period.  Amounts  received  from  the 
consignee,  and  credited  to  a  Consignment  Out  account,  are  liabilities  at  the  close  of  the  fiscal  period, 
because  the  value  of  merchandise  consigned  is  shown  in  the  Inventory  account;  unless  these 
amounts  are  shown  as  liabilities,  the  statement  will  not  be  correct,  because  the  account  with  cash 
or  some  other  asset  was  debited  at  the  time  the  credit  was  made. 
* 


242  CONSIGNMENTS 

CONSIGNMENT  IN  ACCOUNT 

§  234.  The  Purpose  of  this  Account  is  to  show  a  record  of  the  transac- 
tions which  the  consignee  has  with  the  merchandise  consigned  to  him  for  sale.  The 
title  of  the  account  should  contain  the  term  "consignment"  and  the  name  of  the 
consignor,  also  the  word  "in"  or  "from"  to  indicate  the  nature  of  the  account; 
thus  "Consignment  In,  James  Brown"  or  "Consignment  from  James  Brown"  indi- 
cates that  merchandise  has  been  received  on  consignment  from  James  Brown  by 
the  business  for  which  the  books  are  kept.  If  desired,  the  consignments  may 
be  numbered  consecutively  and  this  number,  together  with  the  term  "consign- 
ment" used  as  the  title  of  the  account.;  this  method  is  followed  in  Illustrations 
Nos.  100-103. 

Debit  Each   Consignment   In  Account:  Credit  Each  Consignment  In  Account: 

^  I.     For  (a)  amounts  paid  for  freight,  ^  6.     For    the    sales    of    merchandise 

drayage  and  service  costs;    (b)  belonging  to  the  consignment, 

cash  or  other  assets  given  the  either  for  cash  or  on  account, 

consignor  on  account  of  sales; 
(c)  merchandise  belonging  to 
the  consignment  returned  by 
customers;  and  (d)  commis- 
sion, storage,  insurance  and 
other  costs. 

If  7.  The  Balance  of  Each  Consignment  In  Account  shows  an  asset  if  the 
debit  side  is  the  larger,  or  a  liability  if  the  credit  side  is  the  larger.  A  debit  balance 
indicates  that  the  consignee  has  paid  more  for  handling  the  goods  than  he  has 
received  from  their  sale ;  a  credit  balance  indicates  that  the  consignee  has  received 
more  for  the  sale  of  the  goods  than  the  charges  against  the  same.  The  balance 
of  each  Consignment  In  account  is  shown  as  a  current  asset  or  a  current  liability 
on  the  Balance  Sheet  prepared  fdr  the  consignee. 

If  desired,  the  various  consignment  in  accounts  may  be  kept  in  a  separate  ledger  and  a  con- 
trolling account  with  Consignments  In  or  Consignment  Ledger  maintained  in  the  general  ledger. 
With  this  plan,  the  controlling  account  is  debited  and  credited  with  totals  only,  special  columns 
being  provided  for  amounts  posted  to  the  various  consignment  in  accounts  in  the  consignment 
ledger. 

§  235.  Inventory  of  Consignments  In.  If,  at  the  close  of  the  fiscal  period 
there  is  in  stock  merchandise  which  belongs  to  consignments  from  others,  the  value 
of  this  merchandise  is  not  shown  as  an  asset  on  the  Balance  Sheet  of  the  consignee 
because  it  does  not  belong  to  him.  The  interest  of  the  consignee  in  merchandise 
consigned  to  him  is  shown  on  the  Balance  Sheet  by  the  various  Consignment  In 
accounts. 

COMMISSION  ACCOUNT 

§  236.  The  Purpose  of  this  Account  is  to  show  the  net  amount  received 
as  commission  for  selling  merchandise  on  consignment. 

Debit  the  Commission  Account:  Credit  the  Commission  Account: 

^  I.     For  any  adjustments  which  re-  T[  2.     For  amounts  deducted  as  com- 

duce    the   amount   of   income  mission  from  the  proceeds  of 

from  commission  as  shown  by  consignments  at  the  time  the 

the  credit  to  this  account.  account  sales  is  rendered. 

^  3.  The  Balance  of  the  Commission  Account  shows  the  net  returns  from 
commission ;  it  is  shown  as  an  operating  or  non-operating  income  on  the  Statement 
of  Profit  and  Loss  depending  on  the  nature  of  the  business. 


CONSIGNMENTS 


243 


J^-^>i>/y    /    /f 


L.F|   /^ame  of  Account  and  Explanation- 


Gpnpral 
Dp 


ConsLeddep 
Dr. 


General 
Cr 


\ 


V  •        I, 


/  a  o  o 


r  '^  J  J  ^ 


r  '¥  j-'a 


3  rC  >-v 


/  o 


7-^7 


>  >3  ;>! 


/J- 


rj^ 


^>j> 


/  s\- 


¥    r      o    tA 


r  r 


Illustration  No.  100,  General  Journal. 

EXPLANATION.  Two  debit  columns  are  provided,  one  for  accounts  in  the  consignment 
ledger  and  the  other  for  accounts  in  the  general  ledger;  only  one  credit  column  is  necessary  as  the 
accounts  in  the  consignment  ledger  are  seldom  credited  from  the  general  journal.  Each  amount 
entered  in  the  "Consignment  Ledger,  Dr."  column  is  posted  to  the  debit  of  an  account  in  the  con- 
signment ledger;  the  total  of  this  column  is  posted  to  the  debit  of  the  Consignment  Ledger  account 
in  the  general  ledger  at  the  end  of  the  month. 

*The  break  indicates  a  number  of  entries  omitted. 


244 


CONSIGNMENTS 


(/afoJ'Jf-Z'^^g-.fj)       |uug-^g-c£'.?  r 


Illustration  No.  loi,  Receipts  Side  of  Cash  Book. 


EXPLANATION.  The  ruling  is  similar  to  that  in  Illustration  No.  29,  except  that  two 
special  columns  are  provided,  one  for  cash  sales  of  merchandise  belonging  to  consignments  and  the 
other  for  cash  sales  of  merchandise  from  stock.  Each  amount  entered  in  the  "Consignment  Ledger, 
Cr."  column  is  posted  to  the  credit  of  an  account  in  the  consignment  ledger;  the  total  of  this  column 
is  posted  to  the  credit  of  the  Consignment  Ledger  account  in  the  general  ledger  at  the  end  of  the 
month. 


STORAGE  ACCOUNT 

§  237.  The  Purpose  of  this  Account  is  to  record  the  storage  charges  on 
consignments.  Storage  refers  to  the  charges  made  by  the  consignee  for  the  space 
occupied  by  the  merchandise  belonging  to  the  consignor.  This  storage  charge  is 
based  on  the  rent  cost  to  the  consignee. 


Debit  the  Storage  Account: 
I,     For  allowances  which  reduce  the 
income  from  storage  as  shown 
by  the  credit  to  this  account. 


Credit  the  Storage  Account: 
^  2.     For    the    amount    deducted    as 
storage  from  the  sales  of  each 
consignment  at  the  time  the 
account  sales  is  rendered. 


If  3.  The  Balance  of  the  Storage  Account  shows  the  income  from  storage.  It 
is  shown  as  one  of  the  non-operating  incomes  on  the  Statement  of  Profit  and  Loss. 
If  desired,  the  credit  to  the  Storage  account  may  be  shown  on  the  Statement  of 
Profit  and  Loss  as  a  deduction  from  the  cost  of  rent. 

*The  break  indicates  a  number  of  entries  omitted. 


CONSIGNMENTS 


245 


^%'i-^// 


^'^.-t*':>-y^-tf<>t--^*/ 


Datp 


Li- 


Account  DpbitecL 


Explanation 


"General 


Cons.  Ledger 
Dr. 


PurcJiases 
Dr. 


(.~C'-y<-d'C'a^?'V-7-yLg.'?^  ^o.-^ 


yC 


^  a  o 


rs- 


^^ide^^^^.'-rz^&p^^i.e.'^i^d^  \Pt'^^1<) .,d.tt^^et.<^ 


Illustration  No.  102,  Payments  Side  of  Cash  Book. 

EXPLANATION.  The  ruling  is  similar  to  that  in  Illustration  No.  30,  except  that  two  special 
columns  are  provided,  one  for  accounts  in  the  consignment  ledger  and  the  other  for  cash  purchases 
of  merchandise.  Each  amount  entered  in  the  "Consignment  Ledger,  Dr."  column  is  posted  to  the 
debit  of  an  account  in  the  consignment  ledger;  the  total  of  this  column  is  posted  to  the  debit  of  the 
Consignment  Ledger  account  in  the  general  ledger  at  the  end  of  the  month. 

DRAYAGE  ACCOUNT 

§  238.  Drayage  refers  to  the  cost  of  hauling  the  merchandise  belonging  to 
the  consignor,  either  from  the  station  to  the  warehouse  or  from  the  warehouse  to 
the  customers.  The  amount  charged  the  consignor  is  approximately  the  same  as 
the  cost  to  the  consignee.  The  debits  and  credits  to  this  account  are  the  same  as 
those  to  the  Storage  account,  because  their  nature  is  the  same.  The  balance,  which 
will  be  a  credit,  may  be  shown  on  the  Statement  of  Profit  and  Loss  as  a  non-oper- 
ating income  or  as  a  deduction  from  the  total  cost  of  drayage. 


COMMISSION  SET 

This  is  a  practice  set  without  vouchers  consisting  of  the  transactions  for  two 
months,  performed  by  Thompson  &  Strong,  partners  engaged  in  the  commission 
business.  The  transactions  are  separate  from  the  text  and  are  included  with  the 
books  of  account  necessary  to  record  them.  The  purpose  of  this  set  is  to  provide 
practice  in  recording  transactions  peculiar  to  a  commission  business. 

*The  break  indicates  a  number  of  entries  omitted. 


246 


QUESTIONS  ON  CONSIGNMENTS 


^^-  L.F  I     /fame  of  Account  and  Explanation 


]Cons 
I  .No. 


Cons.Led.rfer 
Cr. 


Sales 
Cr. 


Accts  Rec. 
Dr. 


J  X  r-\  r  o 


-i-  r  r  o 


^y   o    ^  >  a 


>■  ^  ^j 


—  L^<:f-^'Z^^^'<-^>9-Z'frz.e^7T-^S^^e^''^'^''y~ 


■  f  fS\'?'-^\ 


■>-  r  £ ./ 


^ 


♦f  r  ./-  <« 


Illustration  No.  103,  Sales  Journal. 

EXPLANATION.  This  sales  journal  is  similar  to  Illustration  No.  19,  except  that  a  special 
column  is  provided  for  sales  of  merchandise  belonging  to  consignments.  Each  amount  entered  in 
the  "Consignment  Ledger,  Cr."  column  is  posted  to  an  account  in  the  consignment  ledger;  the 
total  of  this  column  is  posted  to  the  credit  of  the  Consignment  Ledger  account  in  the  general  ledger 
at  the  end  of  the  month. 

QUESTIONS 

What  entry  is  made  for  the  value  of  merchandise  received  from  the  owner 

to  be  sold  for  him? 
What  is  the  difference  between  merchandise  purchased  by  the  business  and 

merchandise  received  by  it  on  consignment,  in  so  far  as  title  is  concerned? 
Why  is  it  advisable  for  the  consignee  to  keep  consigned  goods  separate  from 

goods  owned  by  him? 
What  is  the  difference  between  a  consignment  inward  and  a  consignment 

outward? 
How  does  the  consignor  secure  a  profit  on  the  merchandise  on  consignment? 

the  consignee? 
How  is  a  Trial  Balance  made  from  the    consignment    ledger   when    there    is 

an  account  in  the  general  ledger  with  Consignment  Ledger? 
How  is  the  value  of  merchandise  belonging  to  a  consignment  in    shown    on 

the  Balance  Sheet? 
How  is  the  value  of  merchandise   belonging  to  a  consignment    out    shown 

on  the  Balance  Sheet? 
9.     What  is  the  purpose  of  (a)  the  Storage  account,  and  (b)  the  Drayage  account? 
10.     How  are  the  balances  of  the  Storage  and  Drayage  accounts  shown  on  the 

Statement  of  Profit  and  Loss? 


Part  Three — Corporation 

Chapter  XXV 

§  239.  Introduction.  The  purpose  of  the  discussion  in  this  and  succeeding 
chapters  is  to  familiarize  the  student  with  the  apphcation  of  the  principles  of 
accounting  to  a  business  operated  as  a  corporation ;  also  to  give  additional  practice 
in  recording  transactions,  preparing  reports  and  closing  the  ledger.  Two  practice 
sets  applicable  to  a  corporation  business,  separate  from  the  text,  accompany  this 
division.  The  accounting  principles  involved  in  connection  with  recording  these 
transactions  are  applicable  to  a  business  owned  and  operated  by  a  sole  proprietor 
or  partnership,  as  well  as  a  corporation,  with  the  exception  of  those  which  affect 
accounts  peculiar  to  a  corporation. 

§  240.  A  Corporation  is  defined  by  the  Supreme  Court  of  the  United  States 
as  "an  association  of  individuals  united  for  some  common  purpose  and  permitted 
by  the  law  to  use  a  common  name,  and  to  change  its  members  without  dissolution 
of  the  association."  This  means  that  the  corporation  is  an  artificial  person  created 
by  law  for  the  purpose  of  operating  a  specific  business.  When  brought  into  exist- 
ence by  law,  the  corporation  has  the  same  privileges  accorded  any  citizen  governed 
by  the  same  law  and  engaged  in  a  business  of  like  nature.  The  contracts  executed 
by  the  corporation  are  under  the  corporate  name,  and  in  its  legal  relation  it  is 
known  only  by  this  name,  the  same  as  an  individual  is  known  by  his  name. 

John  Smith,  a  citizen  of  Ohio,  owns  and  operates  an  automobile  business  in  Cleveland,  Ohio, 
under  the  name  of  the  Central  Garage.  The  Citizens  Motor  Car  Company,  a  corporation  under 
the  laws  of  Ohio,  operates  an  automobile  business  in  the  same  city,  under  the  name  of  "The  Citizens 
Motor  Car  Company."  If  John  Smith  fails  to  pay  a  debt  incurred  by  him,  and  the  one  to  whom 
it  is  due  seeks  settlement  through  the  courts,  the  summons  to  appear  in  court  will  be  addressed  to 
John  Smith  and  not  the  Central  Garage,  because  he  is  the  individual  who  is  responsible.  If  The 
Citizens  Motor  Car  Company  fails  to  pay  an  account,  and  the  one  to  whom  the  debt  is  due 
seeks  settlement  through  the  courts,  the  summons  to  appear  in  court  will  be  addressed  to  The  Cit- 
izens Motor  Car  Company  because  this  is  the  legal  title  of  the  corporation.  John  Smith  and  The 
Citizens  Motor  Car  Company  each  have  equal  rights  under  the  law,  in  so  far  as  legal  rights  relate 
to  the  automobile  business.  However,  John  Smith  could,  if  he  desired,  add  to  his  automobile  business 
any  other  line  of  merchandise,  but  The  Citizens  Motor  Car  Co.  could  not  do  this  unless  the  right 
granted  it  by  the  State  included  other  lines  of  merchandise,  because  it  was  created  for  a  specific 
purpose  and  cannot  engage  in  any  other  line  outside  of  that  authorized  by  the  law  which  created  it. 

§  241.  The  Purpose  of  a  Corporation  is  (a)  to  provide  capital  for  the 
operation  of  a  business  enterprise,  (b)  to  distribute  the  risk  of  investors,  and  (c) 
to  centralize  control.  The  corporate  form  of  proprietorship  permits  the  investor 
with  a  small  amount  of  money  to  invest  in  a  business  enterprise  which  may  pay 
him  a  profit  on  the  investment,  but  which  may  not  require  any  part  of  his  time  in 
connection  with  its  operation.  Where  one  has  money  to  invest,  it  is  preferable  to 
invest  small  amounts  in  different  enterprises  rather  than  the  entire  amount  in  one 
enterprise;    this  is  especially  true  where  the  investor  does  not  expect  to  take  an 

247 


248  PROPRIETORSHIP  IN  A  CORPORATION 

active  interest  in  the  operations  of  the  businesses  in  which  he  invests.  Distribu- 
tion of  the  investment  may  result  in  a  profit  on  a  part  or  all  of  them;  investment 
in  one  enterprise  will  result  in  either  a  profit  or  a  loss. 

Arthur  Maj's  has  invented  a  device  for  automatically  removing  water  from  the  windshield  of  an 
automobile  while  it  is  raining.  He  is  advised  by  those  experienced  in  the  automobile  business  that 
this  should  prove  to  be  a  salable  article,  but  he  does  not  have  sufficient  capital  to  provide  for  its 
manufacture.  By  combining  his  capital  and  that  of  a  number  of  others  who  reaHze  the  merits  of 
the  invention,  the  necessary  capital  may  be  provided.  The  corporate  form  of  proprietorship 
would  be  preferable,  because  it  is  possible  that  those  who  wish  to  invest  small  amounts  in  this  enter- 
prise would  not  care  to  participate  in  the  management  of  the  business. 

§  242.  Comparison  of  the  Corporation  and  the  Partnership.  A  cor- 
poration differs  from  a  partnership  in  the  manner  of  organization,  method  of 
conducting  the  business,  responsibility  of  investors,  and  the  manner  of  dissolution. 
Both  are  formed  for  the  same  purpose — the  combination  of  capital  for  the  promotion 
of  a  business  enterprise.  The  partnership  is  formed  by  contract;  the  corporation 
is  created  by  the  authority  of  the  law  of  the  state  in  which  it  is  organized.  The 
affairs  of  the  partnership  are  usually  conducted  by  the  partners;  the  affairs  of  the 
corporation  are  in  charge  of  officials  who  are  elected  by  those  who  have  invested 
capital  in  the  corporation.  Each  partner  in  a  partnership  is  individually  responsible 
for  all  the  debts  contracted  through  the  operation  of  the  business;  the  investor  in 
a  corporation  is  not  responsible  for  all  of  the  obligations  of  the  corporation,  because 
these  debts  are  contracted  in  the  name  of  the  corporation  and  must  be  collected 
out  of  the  assets  of  the  corporation.  (The  responsibility  of  the  investor  in  a  cor- 
poration is  limited  by  the  law  which  authorized  the  corporation.)  A  partnership 
continues  during  the  time  specified  in  the  contract,  unless  dissolved  by  a  decree  of 
court,  by  agreement,  by  the  death  of  a  partner,  the  withdrawal  of  a  partner  or  the 
disability  of  a  partner;  the  corporation  continues  during  the  time  authorized, 
and  is  not  affected  by  the  death,  legal  disability,  or  withdrawal  of  any  one  of  those 
who  have  invested  capital  in  it.  Since  the  right  to  continue  as  a  corporation  may 
be  renewed  an  indefinite  number  of  times,  it  is  sometimes  said,  "a  corporation 
never  dies."  A  partner  in  a  partnership  may  sell  his  interest  in  the  partnership 
only  with  the  consent  of  the  other  partners;  each  investor  in  a  corporation  may 
sell  his  interest  at  will,  without  consulting  the  other  members. 

Arthur  Mays  would  have  considerable  trouble  in  securing  the  necessary  capital  to  promote 
the  manufacture  and  sale  of  his  invention  if  each  investor  were  responsible  for  all  of  the  debts  which 
might  be  contracted  in  connection  with  the  operation  of  this  business.  However,  if  each  investor 
knew  that  he  would  not  lose  any  more  than  the  amount  invested,  provided  the  business  did  not 
prove  to  be  profitable,  he  might  be  willing  to  take  a  chance  and  invest  a  small  amount.  Arthur  Mays 
might  hesitate  to  ask  a  friend  to  invest  in  his  enterprise  if  he  knew  that  his  friend  might  be  required 
to  pay  obligations  which  the  business  could  not  pay,  but  if  he  knew  that  his  friend  took  no  chance 
other  than  the  loss  of  the  amount  invested,  he  would  not  hesitate  to  seek  an  investment  from  him, 

§  243.  Proprietorship  in  a  Corporation.  When  one  individual  owns  and 
operates  a  business,  he  has  full  control  of  the  same,  and  the  proprietorship  is  vested 
in  him.  When  two  or  more  partners  own  and  operate  a  business,  the  proprietor- 
ship is  vested  in  the  partnership,  each  partner  possessing  the  right  to  act  for  the 
other  partner  or  partners;  as  the  proprietorship  is  vested  in  the  partnership,  neither 
partner  has  the  right  to  withdraw  or  dispose  of  his  interest  without  the  consent  of 
the  others.  When  a  business  is  operated  as  a  corporation,  the  proprietorship 
is  vested  in  the  corporation  because  it  is  an  artificial  person  created  by  law  for 
the  purpose  of  operating  a  specific  business.  Each  investor  in  the  corporation  has 
certain  legal  rights  in  connection  with  its  operations  which  he  may  transfer  by  sale 
or  gift  without  consulting  any  other  investor.  The  value  of  the  proprietary  interest 
of  a  partner  in  the  business  is  fixed  by  the  Articles  of  Copartnership;  the  value  of 
each  unit  of  proprietorship  in  a  corporation  is  fixed  by  the  state  law  granting 
corporate  authority  to  the  corporation. 


CAPITAL  AND  CAPITAL  STOCK  249 

The  proprietorship  in  a  corporation  is  usually  divided  into  units  of  equal 
value;  the  value  of  each  unit  is  usually  $100.00,  but  may  be  $1.00,  $10.00,  $50.00, 
or  any  other  amount  permitted  by  law.  Each  unit  is  usually  referred  to  as  a  "share" 
or  "a  share  of  stock"  in  the  corporation.  Each  investor  may  own  one  or  more  of 
these  shares;  thus,  if  the  value  of  each  unit  is  $100.00,  and  a  stockholder  purchases 
three  units,  then  his  proprietary  interest  or  investment  is  $300.00. 

Arthur  Mays  decides  that  it  will  require  $25,000.00  capital  to  promote  the  manufacture  and 
sale  of  his  patent.  He  decides  to  make  the  value  of  each  unit  or  share  $50.00,  so  it  will  not  be  nec- 
essary for  those  who  are  interested  to  invest  a  large  amount  unless  they  prefer  to  do  so.  This 
means  that  the  proprietorship  of  the  corporation  will  be  divided  into  five  hundred  shares,  and  that 
these  shares  may  be  owned  by  five  hundred  different  persons,  each  holding  one  share,  or  by  a  lesser 
number  of  individuals,  provided  more  than  one  share  is  owned  by  one  or  more  investors. 

§  244.  Capital  and  Capital  Stock.  The  capital  (proprietorship)  of  a 
corporation  is  the  assets  minus  the  liabilities;  that  is,  the  net  amount  remain- 
ing after  all  the  debts  have  been  paid.  Capital  stock  is  the  maximum  amount 
which  the  investors  in  the  corporation  are  authorized  to  invest.  If  at  the  beginning 
of  the  corporation  the  full  amount  of  capital  stock  is  subscribed  and  paid  for  at 
its  par  value,  the  capital  and  capital  stock  of  the  corporation  will  be  the  same  at 
that  time;  however,  it  will  not  remain  the  same  because  the  net  assets  of  the  corpor- 
ation will  either  increase  or  decrease  through  the  operations  of  the  business.  Each 
investor  (stockholder)  has  the  same  interest  in  the  net  capital  as  he  has  in  the  out- 
standing capital  stock;  one  who  owns  one- thousandth  of  the  capital  stock  of  the 
corporation  also  owns  the  right  to  one-thousandth  of  the  capital  of  the  corporation. 

If  Arthur  Mays  receives  $25,000.00  cash  from  the  investors  in  the  corporation  which  is  to 
promote  the  manufacture  and  sale  of  his  patent,  the  capital  and  capital  stock  of  the  corporation  at 
the  beginning  is  $25,000.00.  If  at  the  end  of  the  first  year,  the  assets  of  the  corporation  are  $40,000.00 
and  the  liabilities  are  $10,000.00,  the  capital  or  proprietary  interest  at  that  time  is  $30,000.00. 

§  245.  The  Method  of  Organizing  a  Corporation  is  prescribed  by  the 
law  of  the  state  in  which  it  is  organized.  On  page  250  is  given  the  procedure  for 
organizing  a  corporation  in  New  York  (at  the  left),  and  Illinois  (at  the  right); 
the  method  in  each  of  the  other  states  is  practically  the  same,  except  the  par  value 
of  stock,  the  minimum  number  of  stockholders  at  the  beginning,  and  the  amount 
of  investment  required  before  the  certificate  of  incorporation  is  granted. 

§  246.  The  Charter  of  a  corporation  is  a  certificate  signed  by  the  incor- 
porators and  approved  by  the  proper  state  officials;  it  is  the  written  authority 
under  which  the  corporation  does  business.  Illustration  No.  104  shows  the  form 
of  a  charter.  When  the  charter  is  granted,  the  corporation  comes  into  existence; 
and  remains  in  existence  until  the  expiration  of  the  time  for  which  the  charter 
is  granted   or  until  dissolved   by  legal  procedure. 

§  247.  When  the  Charter  has  been  Granted,  the  corporation  is  ready 
to  begin  business.  The  first  business  to  be  performed  is  to  sell  the  stock,  that  is, 
secure  cash  or  other  property  from  those  who  are  to  invest  in  the  corporation.  The 
purpose  of  the  corporation  is  to  provide  capital  for  a  business  enterprise,  and  this 
capital  is  secured  through  the  sale  of  its  stock  to  those  who  Wish  to  invest. 
Some  states  require  that  a  part  of  the  capital  stock  be  subscribed  for  before  the 
charter  is  issued;  in  these  states,  it  is  customary  to  have  those  who  wish  to 
invest  in  the  corporation  subscribe  in  writing  for  the  number  of  shares  to  be 
purchased.  Where  a  part  of  the  capital  is  not  to  be  paid  in  until  after  the  corpora- 
tion is  formed,  these  written  promises  for  the  subscription  to  stock  may  be  secured 
after  the  charter  is  granted.  When  the  necessary  capital  has  been  provided  through 
the  sale  of  stock,  the  corporation  is  ready  to  begin  its  business  activities. 


250 


ORGANIZING  A  CORPORATION 


Illinois 

"A  corporation  may  be  formed  for  any 
lawful  purpose  (except  banking,  insurance, 
real  estate  brokerage,  operation  of  railroads, 
and  loaning  money)  whenever  three  or  more 
persons,  citizens  of  the  United  States,  at  least 
one  of  whom  shall  be  a  citizen  of  Illinois,  shall 
sign,  seal,  and  acknowledge  a  statement  of 
incorporation  setting  forth: 

1.  Names  and  post  office  addresses  of  the 
incorporators. 

2.  Name  of  the  proposed  incorporation. 

3.  A  clear  and  definite  statement  of  the 
object  or  objects  for  which  it  is  formed. 

4.  The  period  of  duration. 

5.  Location  of  the  principal  office  in  this 
State,  giving  town  or  city,  street  and  number, 
if  any. 

6.  Number  of  shares  into  which  the  capital 
stock  is  to  be  divided,  whether  all  or  part  of 
same  shall  have  par  value,  and  if  so,  the  par 
value  thereof,  which  shall  not  be  less  than 
$5.00  nor  more  than  $100.00  a  share;  whether 
ail  or  part  of  the  same  shall  have  no  par  value; 
and  if  there  is  to  be  more  than  one  class  of 
stock  created,  a  description  of  different  classes, 
number  of  shares  of  each,  and  relative  rights, 
interests  and  preferences  each  class  shall  rep- 
resent. 

7.  Names  and  addresses  (give  street  and 
number)  of  the  original  subscribers  to  the  cap- 
ital stock  and  amount  subscribed  by  each. 

8.  Total  amount  of  authorized  capital 
stock. 

9.  Amount  of  such  stock  it  is  proposed  to 
issue  at  once,  which  shall  not  be  less  than 
$1,000.00. 

10.  The  payment  of  at  least  one-half  of  the 
capital  stock  having  a  par  value  and  of  not 
less  than  $5.00  per  share  for  each  share  of  cap- 
ital stock  having  no  par  value,  which  it  is 
proposed  to  issue  at  once,  with  a  description  of 
the  nature  and  value  of  the  property,  if  any, 
paid  for  such  capital  stock. 

11.  Number,  names,  and  post  office  ad- 
dresses of  directors  by  street  and  number,  at 
least  one  of  whom  shall  be  a  resident  of  this 
State,  and  the  term  for  which  elected." 

Procedure  for  the  Organization  of  a  Corporation  in  New  York  and  Illinois 

§  248.  A  Stockholder  in  a  corporation  is  a  person  who  owns  one  or  more 
shares  of  stock  in  the  corporation.  He  may  have  come  into  possession  of  this 
stock  through  purchase  from  the  corporation  itself,  or  through  purchase  or  gift  from 
another  stockholder;  in  either  case  his  ownership  is  evidenced  by  a  written  state- 
ment known  as  a  certificate  of  stock,  Illustration  No.  107,  and  by  the  proper 
record  of  this  certificate  on  the  books  of  the  corporation. 


New  York 

"Except  as  provided  in  section  2a  of  this 
chapter,  three  or  more  persons  may  become  a 
stock  corporation  for  any  lawful  business  pur- 
pose or  purposes,  by  making,  signing,  acknowl- 
edging, and  filing  a  certificate  which  wall 
contain: 

1.  The  name  of  the  proposed  corporation. 

2.  The  purpose  or  purposes  for  which  it  is 
to  be  formed. 

3.  The  amount  of  capital  stock,  and  if  any 
portion  be  preferred  stock  the  preferences 
thereof. 

4.  The  number  of  shares  of  which  the  cap- 
ital stock  shall  consist,  the  value  of  which  shall 
not  be  less  than  five  nor  more  than  one  hundred 
dollars  and  the  amount  of  capital  not  less  than 
five  hundred  dollars,  with  which  the  said  cor- 
poration will  begin  business.  [By  amendment 
of  the  original  law,  stock  may  now  be  issued 
which  has  no  par  value.] 

5.  The  city,  village,  or  town  in  which  its 
principal  business  office  is  to  be  located.  If  it 
is  to  be  located  in  the  city  of  New  York,  the 
borough  there  in  which  it  is  to  be  located. 

6.  Its  contemplated  duration.  This  may 
be  made  perpetual. 

7.  The  number  of  its  directors,  not  less 
than  three. 

8.  The  names  and  post  office  addresses  of 
the  directors  for  the  first  year. 

9.  The  names  and  post  office  addresses  of 
the  subscribers  to  the  certificate  of  incorpora- 
tion and  the  number  of  shares  in  the  corpora- 
tion subscribed  by  each." 

The  certificate  must  be  signed  by  the 
three  or  more  persons  who  make  application 
for  the  charter  and  their  signatures  acknowl- 
edged by  a  Notary  Public  or  other  designated 
official. 


Robert  C.  Brown  subscribes  and  pays  for  four  shares  of  stock  in  the  corporation  organized  by 
Arthur  Mays  for  the  purpose  of  promoting  the  sale  of  his  patent,  the  windshield  cleaner.  Mr.  Brown 
will  receive,  as  evidence  of  the  cash  paid,  a  written  statement  in  the  form  of  a  certificate  of  stock, 
showing  the  name  of  the  corporation,  the  number  of  shares  he  has  purchased,  and  the  par  value  of 
each.     This  is  property  which  belongs  to  Robert  C.  Brown  and  which  he  can  dispose  of  at  will. 


CHARTER  OF  INCORPORATION  251 

Charter  of  Incorporation 

Be  it  known  that  J.  C.  Wilson,  J.  W.  Jones,  R.  L.  Wood,  E.  E.  Miller,  and  W.  S.  Shields,  all 
more  than  twenty-one  years  old,  are  hereby  constituted  a  body  politic,  and  corporated  by  the  name  and 
style  of  the  Union  Printing  and  Publishing  Company,  with  a  capital  stock  of  Fifty  {$50,000.00)  Thou- 
sand Dollars. 

The  general  powers  of  said  corporation  are: 

1.  To  sue  and  be  sued  by  the  corporate  name. 

2.  To  have  and  use  a  common  seal,  which  it  may  alter  at  pleasure;  if  710  common  seal,  then  the 
signing  of  the  name  of  the  corporation  by  any  duly  authorized  officer  shall  be  legal  and  binding. 

J.  To  purchase  and  hold,  or  receive  by  gift,  any  addition  to  the  personal  property  owned  by  said 
corporation,  any  real  estate  necessary  for  the  transaction  of  the  corporate  business,  and  also  to  purchase 
and  accept  any  real  estate  in  payment  or  part  payment  of  any  debt  due  to  the  corporation,  and  sell  realty 
for  corporation  purposes. 

4.  To  establish  by-laws  and  make  all  rules  and  regulations,  not  inconsistent  with  the  laws  and 
constitutions,  deemed  expedient  for  the  management  of  corporate  affairs. 

5.  To  appoint  such  subordinate  officers  and  agejits,  in  addition  to  the  President,  Secretary,  and 
Treasurer,  as  the  business  of  the  corporation  may  require. 

6.  To  designate  the  name  of  the  office,  and  fix  the  compensation  of  the  officers. 

7.  To  borroiv  money  and  issue  notes  or  bonds  upon  the  face  of  the  corporate  property,  and  also  to 
execute  a  mortgage  or  mortgages  as  further  security  for  the  repayment  of  money  thus  borrozved. 

The  following  provisions  and  restrictions  are  coupled  with  said  grant  of  powers: 

1.  A  failure  to  elect  officers  at  the  proper  time  does  not  dissolve  the  corporation,  but  those  in 
office  hold  witil  election,  or  appointment  and  qualification  of  their  successors. 

2.  The  term  of  all  offices  may  be  fixed  by  the  by-laws  of  the  corporation;  the  same,  however,  not 
to  exceed  two  years. 

J.  The  corporation  may,  by  by-laws,  make  regulations  concerning  the  subscription  for,  or  transfer 
of  stock;  fix  upon  the  amount  of  capital  to  be  invested  in  the  enterprise;  the  division  of  the  same  into 
shares;  the  time  required  for  the  payment  thereof  by  the  subscribers  to  the  stock;  the  amount  to  be  called 
in  at  one  time.  The  right  of  action  should  exist  in  a  corporation  to  sue  a  defaulting  stockholder  for  the 
failure  to  pay  for  stock  subscribed  to,  when  called  upon  to  do  so. 

4.  The  corporation  shall  have  power  to  purchase  type,  presses,  paper,  etc.,  for  the  purpose  of 
printing  newspapers,  books,  pamphlets,  etc.,  and  in  general,  to  execute  all  orders  for  printing  books, 
and  the  execution  of  all  orders  for  job  work  usually  undertaken  and  performed  in  first-class  printing  and 
publishing  associations. 

5.  The  Board  of  Directors  shall  consist  of  five  or  more  members  at  the  option  of  the  corporation, 
to  be  elected  either  in  person  or  by  proxy  by  the  majority  of  the  votes  cast,  each  share  representing  one 
vote. 

6.  A  majority  of  the  Board  of  Directors  shall  constitute  a  quorum,  and  shall  fill  all  vacancies 
until  next  election.  The  first  Board  of  Directors  shall  consist  of  five  or  more  incorporators  who  shall 
apply  for,  and  obtain  the  charter. 

7.  The  books  of  the  corporation  shall  show  the  original  and  subsequent  stockholders,  their  re- 
spective interests,  the  amount  which  has  been  paid  on  the  shares  subscribed,  the  transfer  of  stock,  and  other 
transactions  in  which  it  is  presumed  the  stockholders  or  creditors  may  have  an  interest. 

8.  By  no  implication  or  construction  shall  the  corporation  be  deemed  to  possess  any  powers,  except 
those  hereby  expressly  given  or  necessarily  implied  from  the  nature  of  the  business  for  which  the  charter 
is  applied. 

We,  the  undersigned,  apply  in  the  State  of  Tennessee,  by  virtue  of  the  law  of  the  land,  for  a  charter 
of  incorporation  for  the  purpose  of,  and  with  the  powers  declared  in  the  foregoing  instrument. 
Witness  our  hand,  August  16,  IQ22. 

Illustration  No.  104,  Charter  of  Incorporation  (Tennessee). 

EXPLANATION.  It  will  be  observed  that  the  par  value  of  each  share  is  to  be  fixed  by  the 
Board  of  Directors,  and  is  not  stated  in  the  charter;  also  that  the  number  of  incorporators  is  five 
instead  of  three,  as  required  in  New  York  and  Illinois. 

§  249.  Classification  of  Stock.  Those  who  make  application  for  the  charter 
designate  the  rights  and  privileges  of  the  stockholders  in  the  corporation.  If  some 
of  the  stock  carries  with  it  rights  and  privileges  not  granted  to  the  other  stock,  it 
will  be  necessary  to  indicate  this  in  the  certificate  of  stock  issued  to  each  stock- 
holder.    There  are  usually  two  kinds  of  stock  issued,  common  and  preferred. 

The  discussion  of  common  and  preferred  stock  given  in  §§  250  and  251  is  for  the  information 
of  the  bookkeeper  in  recording  the  transactions  in  connection  with  the  transfer  of  corporate  stock. 
The  legal  distinction  between  these  two  classes  of  stock  may  be  ascertained  from  a  study  of  corpo- 
ration law  and  the  laws  of  the  various  states  authorizing  the  organization  of  corporations. 

§  250.  Common  Stock.  Common  stock  is  that  issued  to  stockholders 
who  are  to  participate  in  the  management  of  the  business,  and  to  share  in  the 


252  CLASSIFICATION  OF  STOCK 

profits  which  may  result  from  its  operations  without  financial  preference.  The 
term  "common"  as  used  in  connection  with  the  stock  in  a  corporation  is  not  to 
be  interpreted  as  meaning  that  this  stock  has  less  value  than  other  stock  issued  by 
the  corporation.  It  is  used  only  to  distinguish  between  the  stock  which  has  no 
financial  preference  and  that  which  has  financial  preference. 

§  251.  Preferred  Stock.  Preferred  stock  is  that  issued  to  stockholders 
who  wish  to  have  the  amount  of  the  income  from  their  investment  in  the 
corporation  stated,  and  who  do  not  care  to  take  an  active  part  in  the  manage- 
ment of  the  corporation.  This  statement  is  not  to  be  interpreted  as  meaning  that 
the  preferred  stockholders  do  not  have  the  privilege  of  taking  an  active  part  in  the 
management  of  the  business,  as  this  is  often  permitted  through  the  authority 
given  in  the  charter.  Preferred  stock  always  specifies  a  fixed  rate  of  dividend.  If 
this  dividend  is  payable  out  of  the  profits  of  each  year,  the  preferred  stock  is  "non- 
cumulative;"  if  the  dividend  is  to  be  paid  out  of  future  profits,  when  the  profits 
of  each  year  are  not  sufficient  to  pay  the  rate,  it  is  "cumulative." 

§  252.  No  Par  Value  Stock  refers  to  stock  issued  without  value  in  those 
states  which  authorize  corporations  to  issue  no  par  value  stock.  The  laws  in  these 
states  set  a  minimum  (nominal)  value  at  which  no  par  value  stock  may  be  issued; 
thus,  in  Illinois  at  least  $io.oo  must  be  collected  for  each  share  of  no  par  value 
stock  before  the  corporation  is  authorized  to  issue  the  stock.  The  market  value 
of  each  share  of  no  par  value  stock  is  determined  by  dividing  the  proprietorship 
(net  assets)  of  the  corporation  by  the  total  number  of  shares  issued. 

The  purpose  of  issuing  stock  with  no  par  value  is  to  encourage  those  who  wish  to  invest  in 
corporation  stock  to  ascertain  the  real  value  of  the  stock  before  purchasing  it,  rather  than  to  base 
the  purchase  price  on  the  par  value  as  stated  in  the  certificate.  The  value  of  a  certificate  of  stock 
which  states  that  the  holder  is  entitled  to  ten  shares  of  stock  in  the  corporation,  par  value  $ioo.oo 
per  share,  may  or  may  not  be  $1,000.00;  yet  the  buyer  might  be  induced  to  pay  $1,000.00  for  it 
because  of  this  statement.  If  the  statement  in  the  certificate  were  to  the  effect  that  the  holder  was 
entitled  to  ten  shares  of  stock  in  the  corporation,  without  any  value  placed  on  the  stock,  the  pur- 
chaser could  ascertain  the  value  only  from  a  knowledge  of  the  number  of  shares  which  the  corpora- 
tion had  issued  and  the  value  of  the  net  assets  of  the  corporation. 

§  253.  Unissued  Stock  is  that  stock  which  is  authorized  in  the  charter 
but  has  not  been  issued  to  stockholders;  it  has  no  monetary  value  because  it  has 
not  been  issued.  Under  no  condition  should  unissued  capital  stock  be  recorded 
as  an  asset,  or  confused  with  treasury  stock.  It  is  customary  to  record  the  unissued 
capital  stock  on  the  books  of  the  corporation  so  that  each  stockholder  may  know 
from  the  report  submitted  to  him  by  the  accounting  department,  the  par  value 
of  the  stock  which  the  corporation  has  the  authority  to  issue,  but  which  has  not 
yet  been  issued. 

§  254.  Treasury  Stock  is  capital  stock  which  has  been  fully  paid  up  and 
issued,  but,  through  purchase  or  gift,  comes  back  into  the  possession  of  the  cor- 
poration. A  corporation  has  the  right  to  purchase  its  own  stock  unless  the  state 
law  under  which  it  was  organized  forbids  it.  As  a  rule,  corporations  are  not  per- 
mitted to  buy  their  own  stock  because  this  would  defeat  the  purpose  of  the  cor- 
poration, which  is  to  distribute  the  ownership  of  the  stock  among  many.  Unissued 
capital  stock  must  not  be  confused  with  treasury  stock;  the  former  represents 
stock  which  has  not  been  issued,  and  the  latter,  stock  which  has  been  issued, 
but  later  acquired  by  the  corporation  through  purchase  or  donation. 

Stock  purchased  may  be  illustrated  as  follows:  a  corporation  wishes  to  have  each  of  its  em- 
ployees  own  one  or  more  shares  of  its  stock.  To  encourage  this,  it  agrees  to  buy  back  the  stock  held 
by  an  employee  should  he  leave  the  employ  of  the  corporation.  Stock  is  issued  to  an  employee  and 
recorded  in  the  same  manner  as  stock  issued  and  sold  to  another.  Should  the  employee  sever  his 
connection  with  the  corporation,  his  stock  would  be  purchased  by  the  corporation  and  held  in  the 
treasury  until  sold  again. 

Stock  donated  to  a  corporation  may  be  illustrated  as  follows:  the  stockholders  of  a  corporation 
engaged  in  the  manufacture  of  automobiles  plan  to  bring  out  a  new  model;  however,  they  wish  to 
have  it  thoroughly  tried  out  before  offering  it  on  the  market.  The  common  stockholders  decide  to 
donate  to  the  corporation  a  designated  number  of  shares  of  their  stock  to  be  sold  in  order  to  provide 
funds  for  developing  the  new  car.  This  stock,  when  received  by  the  corporation,  will  be  recorded 
as  treasury  stock  and  held  as  such  until  it  is  sold. 


SURPLUS  253 

§  255.  Value  of  Stock.  Stock  in  a  corporation  may  have  four  different 
values,  as  follows: 

(i)  The  par  value  is  the  amount  stated  in  the  certificate;  no  par  value  stock 
does  not  have  a  par  value. 

(2)  The  market  ^■alue  is  the  price  at  which  the  stock  is  quoted  on  a  Stock 
Exchange,  or  at  which  it  can  be  sold;  stock  quoted  at  ".79"  is  worth 
$79.00  for  each  share. 

(3)  The  book  value  of  stock  is  the  par  value  plus  the  surplus  or  the  par 
value  minus  the  deficit.  If  the  capital  stock  is  one  hundred  thousand 
dollars  and  the  surplus  ten  thousand  dollars,  each  hundred  dollar  share 
of  stock  has  a  book  value  of  one  hundred  and  ten  dollars;  if  there  is  no 
surplus,  but  a  deficit  of  ten  thousand  dollars,  the  book  value  is  ninety 
dollars  per  share. 

(4)  The  real  value  is  the  amount  that  would  be  received  for  the  stock  if  the 
assets  of  the  corporation  were  liquidated;  the  real  value  and  the  book 
value  would  be  the  same  if  the  assets  were  sold  for  the  value  recorded 
on  the  books  of  the  corporation. 

§  256.  A  Dividend  is  that  part  of  the  profit  of  the  corporation  distributed 
to  the  stockholders.  The  Board  of  Directors  determines  the  amount  of  profit  to 
be  distributed  as  dividend,  and  the  amount  to  be  retained  as  surplus.  The  divi- 
dend is  usually  a  certain  per  cent  of  the  par  value  of  the  stock;  a  dividend  of  6% 
means  that  each  stockholder  who  owns  $100.00  par  value  of  stock  in  the  corpo- 
ration will  receive  $6.00  dividend. 

§  257.  An  Assessment  is  the  reverse  of  a  dividend;  that  is,  the  stockholder  is 
required  to  pay  to  the  corporation  a  certain  per  cent  of  the  par  value  of  the  stock 
he  holds  instead  of  receiving  from  the  corporation  a  certain  per  cent  of  the  par 
value  of  his  stock.  Assessments  are  necessary  when  the  working  capital  of  the 
corporation  has  been  impaired  through  the  operations  of  the  business,  and  it  is 
necessary  to  procure  additional  working  capital  in  order  to  continue  the  operation 
of  the  business.  Each  stockholder  must  pay  the  assessment  levied  by  the  Board 
of  Directors  unless  the  stock  he  holds  is  non-assessable;  the  stockholder  who  holds 
stock  subject  to  assessment  a^nd  refuses  to  pay,  becomes  a  debtor  to  the  corporation, 
and  the  amount  can  be  collected  in  the  same  manner  as  any  other  debt. 

§  258.  The  Surplus  of  a  corporation  is  that  part  of  the  profit  which  has 
not  been  distributed  to  stockholders  in  dividends.  This  surplus  is  one  of  the  lia- 
bilities of  the  corporation  to  the  stockholders.  The  proprietorship  of  the  corpora- 
tion is  the  outstanding  capital  stock  plus  the  surplus. 

§  259.  Bonds.  A  bond  is  a  long-time  note  arranged  in  a  special  form.  Bonds 
are  usually  issued  in  denominations  of  $100.00,  $500.00,  and  $1000.00,  and  usually 
secured  by  a  mortgage  on  real  estate  or  personal  property  owned  by  the  corpora- 
tion. Each  bond  is  composed  of  two  sections:  one,  the  bond  itself,  which  is  the 
written  promise  of  the  corporation  to  pay  the  amount  mentioned;  and  the  other, 
the  interest  coupons,  that  is,  the  written  promises  of  the  corporation  to  pay 
annually  or  semi-annually  a  certain  amount  of  interest.  A  bond  of  $1,000.00 
payable  in  twenty  years,  with  interest  payable  semi-annually  at  6%,  would  have 
forty  coupons,  each  coupon  being  a  written  promise  or  obligation  of  the 
corporation  executing  the  bond  to  pay  $30.00.  On  the  due  date  of  each  coupon, 
the  holder  of  the  bond  detaches  it   from  the  bond,  and  presents  it  to  the  trustee 


254  SINKING  FUND 

(usually  a  bank  or  trust  company)  for  collection.  When  the  bond  referred  to  is 
due,  at  the  end  of  twenty  years,  all  of  the  coupons  will  have  been  removed.  Bonds 
are  issued  by  both  public  and  private  corporations;  that  is,  a  city,  a  county  or  a 
state  may  borrow  money  by  issuing  bonds  in  the  same  way  as  an  incorporated 
railroad  or  other  business  enterprise. 

§  260.  Sinking  Fund  refers  to  assets  owned  by  the  corporation,  but  usually 
in  the  hands  of  a  trustee  who  represents  the  bondholders.  When  a  mortgage  is 
given  to  secure  the  bondholders,  this  usually  specifies  the  amount  of  cash  or  other 
assets  to  be  placed  in  the  hands  of  the  trustee  each  year,  so  that  he  may  have 
available,  at  the  maturity  of  the  mortgage,  funds  with  which  to  pay  the  bonds 
it  secures.  The  mortgage  usually  specifies  the  nature  of  the  securities  to  be  pur- 
chased by  the  trustee  with  the  cash  received  from  the  corporation. 

§  261.  Sinking  Fund  Reserve  refers  to  a  yearly  reserve  set  up  against 
current  profits  in  anticipation  of  the  payment  of  bonds  at  maturity;  the  amount 
of  this  yearly  reserve  is  usually  based  on  the  number  of  years  the  bonds  have  to 
run — one-tenth  of  the  amount  if  they  mature  in  ten  years,  one  twentieth  if  they 
mature  in  twenty  years,  one  fiftieth  if  they  mature  in  fifty  years.  After  the  net 
profit  for  each  year  is  closed  into  the  Surplus  account,  that  part  of  the  profit  to 
be  set  aside  as  reserve  is  taken  out  of  the  Surplus  account  and  credited  to  the 
Sinking  Fund  Reserve  account.  At  the  maturity  of  the  bonds,  the  Sinking  Fund 
Reserve  Fund  account  will  have  a  credit  equal  to  the  par  value  of  the  bonds  and 
is  transferred  to  the  Surplus  account. 

A  sinking  fund  differs  from  a  sinking  fund  reserve  in  that,  in  the  former,  the 
cash  is  given  to  the  trustee  and  invested  by  him  in  securities  according  to  the  terms 
of  the  mortgage,  while  in  the  latter,  a  part  of  the  profit  is  credited  to  the  reserve 
account  and  the  cash  remains  as  working  capital  for  the  corporation.  The  investor 
in  a  bond  should  be  assured  that  his  investment  is  well  secured  and  that  his  interest 
is  safeguarded  throughout  the  life  of  the  bonds. 

§  262.     Method  of  Conducting  the  Business  of  a    Corporation.      The 

affairs  of  a  partnership  are  conducted  by  the  partners  or  managers  selected  b}^ 
them.  The  affairs  of  a  corporation  are  directed  by  the  officers  elected  by  the  Board 
of  Directors.  The  members  of  the  Board  of  Directors  are  elected  by  the  stock- 
holders, each  stockholder,  whose  stock  permits  him  to  vote,  being  entitled  to  one 
vote  for  each  share  of  stock  which  he  owns.  After  the  organization  of  the  cor- 
poration is  completed,  the  stockholders  meet  and  elect  a  Board  of  Directors  who 
are  responsible  to  them  for  the  management  of  the  affairs  of  the  corporation. 
The  Board  of  Directors  elect  from  their  number  ofificers  who  are  responsible  to 
them  for  the  detailed  operations  of  the  business,  usually  President,  Secretary  and 
Treasurer,  whose  duties  are  fixed  by  the  Board  of  Directors.  Stockholders  meet 
annually  to  elect  a  Board  of  Directors;  this  Board  usually  elects  the  officers  at 
the  same  time.  One  stockholder  might  control  the  entire  operations  of  the  cor- 
poration if  he  owned  more  than  fifty  per  cent  of  the  stock,  because  he  could  elect 
the  Board  of  Directors,  and  through  his  control  of  the  majority  of  the  stock,  elect 
the  officers.  The  law  under  which  a  corporation  is  formed  usually  prohibits  one 
stockholder  from  owning  all  the  stock,  but  there  is  no  law  which  prohibits  a  stock- 
holder from  purchasing  the  majority  of  the  stock. 

§  263.  Income  Tax  for  a  Corporation.  Each  corporation  is  required  to 
pay  a  Federal  Income  Tax  on  its  net  income  the  same  as  an  individual.  The  amount 
of  the  tax  is  specified  in  the  law  which  requires  its  payment.  This  tax  is  levied  on 
the  net  income,  which  is  defined  as  "gross  income  less  the  deductions  allowed." 
For  the  purpose  of  applying  the  federal  income  tax,  corporations  are  divided  into 


INCOME  TAX  FOR  A  CORPORATION  255 

two  classes,  corporations  and  personal  service  corporations.  The  latter  title  is 
used  to  distinguish  between  the  smaller  corporations  in  which  each  stockholder 
takes  an  active  interest  in  the  business,  and  the  larger  corporations  where  the 
stockholder  purchases  stock  as  an  investment  and  takes  no  active  interest  in  the 
business. 

Quoting  from  the  Revenue  Act  of  1921 : 

"The  term  'personal  service  corporation'  means  a  corporation  whose  income 
is  to  be  ascribed  primarily  to  the  activities  of  the  principal  owners  or  stockholders 
who  are  themselves  regularly  engaged  in  the  active  conduct  of  the  affairs  of  the 
corporation  and  in  which  capital  (whether  invested  or  borrowed)  is  not  a  material 
income-producing  factor;  but  does  not  include  any  foreign  corporation,  nor  any 
corporation  50  per  centum  or  more  of  whose  gross  income  consists  (i)  of 
gains,  profits,  or  income  derived  from  trading  as  a  principal,  or  (2)  of  gains,  profits, 
commissions,  or  other  income,  derived  from  a  government  contract  or  contracts 
made  between  April  6,  1917,  and  November  11,  1918,  both  dates  inclusive." 

The  tax  of  a  personal  service  corporation  is  more  of  the  nature  of  the  tax 
imposed  on  a  partnership  as  the  taxes  are  paid  by  the  individual  stockholders 
and  not  by  the  corporation. 

§  264.  Bookkeeping  for  a  Corporation.  The  nature  of  the  work  required 
to  record  the  transactions  performed  by  a  corporation  does  not  differ  from  that 
required  to  record  the  same  transactions  performed  by  a  partnership.  The  only 
difference  between  keeping  books  for  a  corporation  and  for  a  partnership,  is  the 
addition  of  accounts  required  to  record  the  capital  invested  in  the  corporation  and 
addition  of  accounts  required  to  record  the  capital  invested  in  the  corporation 
and  the  profits  resulting  from  its  operations.  These  accounts  are  discussed  in 
Chapter  XXVI. 

QUESTIONS 

1.  Give  three  reasons  why  you  would  prefer  having  money  invested  in  a  cor- 

poration instead  of  in  a  partnership. 

2.  In  what  respect  does  a  corporation  differ  from  an  individual? 

3.  What  are  the  requirements  for  forming  a  corporation  in  your  home  state? 

4.  When  would  common  stock  be  more  valuable  than  preferred  stock? 

5.  What  are  the  four  values  that  may  be  attached  to  stock?     Explain  each. 

6.  What  is  the  difference  between  par  value  and  no  par  value  stock?     Explain 

the  reason  for  each. 

7.  Why  does  stock  sell  (a)  for  more  than  its  par  \alue;    (b)  for  less  than  its  par 

value? 

8.  W'hy  should  a  corporation  be  willing  to  pay  more  than  the  book  value  for  the 

assets  of  a  going  business  which  it  purchases? 

9.  Would  the  sales  on  account  in  a  retail  business  operated  by  a  corporation  be 

recorded  in  a  different  manner  than  they  would  in  a  business  of  the  same 
nature   owned   and   operated   by   partners? 
10.     What  authority  does  a  stockholder  in  a  corporation  have  in  connection  with 
the  operations  of  the  business  of  the  corporation? 


Chapter  XXVI 

ACCOUNTS  PECULIAR  TO  A  CORPORATION 

The  Purpose  of  this  Chapter  is  to  explain  the  accounts  which  are  pecuHar 
to  a  corporation ;  these  include  the  accounts  necessary  to  record  the  proprietorship 
of  the  corporation  and  the  transactions  which  occur  only  in  the  operations  of  a 
business  conducted  by  a  corporation.  The  accounts  discussed  are  Capital  Stock, 
Unissued  Capital  Stock,  Subscribers  to  Capital  Stock,  Subscriptions  to  Capital 
Stock,  Treasury  Stock,  Donated  Treasury  Stock,  Surplus,  Dividend,  Organization 
Expense,  Bonds  Payable,  and  Goodwill. 

CAPITAL  STOCK  ACCOUNT 
§  265.  The  Purpose  of  this  Account  is  to  show  the  par  value  of  the  capital 
stock  authorized  by  the  charter,  or  the  par  value  of  the  capital  stock  issued  and 
not  canceled.  There  are  two  methods  of  keeping  the  Capital  Stock  account:  with 
one  method,  the  Capital  Stock  account  is  credited  with  the  amount  of  the  capital 
stock  authorized  by  the  charter  at  the  time  it  is  granted;  with  the  other  method, 
the  Capital  Stock  account  is  credited  only  with  that  part  of  the  capital  stock  issued. 

Debit   the   Capital   Stock   Account:  Credit  the   Capital  Stock  Account: 

^  I.  For  the  par  value  of  stock  with-  *\  2.  For  (a)  the  par  value  of  capital 
drawn  by  amendment  to  the  stock  authorized  by  the  char- 
charter;  or  when  the  corpora-  ter  or  by  amendment  thereto, 
tion  is  dissolved,  for  the  par  or  (b)  the  par  value  of  capital 
value  of  capital  stock  as  shown  stock  at  the  time  the  stock 
on  the  credit  side.  is  issued. 

^  3.  The  Balance  of  the  Capital  Stock  Account  will  show  (a)  the  par  value  of  the 
authorized  capital  stock  of  the  corporation  when  credited  with  the  full  authorized 
capital  stock  at  the  time  of  organization;  or  (b)  the  par  value  of  the  capital  stock 
issued  and  outstanding  when  credited  with  the  stock  as  issued.  The  par  value  of 
the  authorized  capital  stock  and  the  par  value  of  the  capital  stock  issued  are  shown 
on  the  Balance  Sheet. 

UNISSUED  CAPITAL  STOCK  ACCOUNT 
§  266.  The  Purpose  of  this  Account  is  to  show  the  par  value  of  the  un- 
issued capital  stock;  that  is,  the  stock  authorized  by  the  charter  but  not  sold  and 
issued.  This  account  is  not  needed  when  the  capital  stock  is  all  issued  at  the  time 
of  organization,  nor  when  the  Capital  Stock  account  is  used  to  show  the  par  value 
of  stock  issued. 

Debit  this  Account:  Credit  this  Account: 

T[  I.     For   the   par   value  of  the  cap-  1[  2.     For   the   par   value  of  the  cap- 

ital stock   authorized    by    the  ital    stock    issued    when     the 

charter  when   this  amount   is  amount  of  the  authorized  cap- 

credited  to  the  Capital  Stock  ital    stock    is  recorded  on  the 

account  at  the  time  of  organ-  debit   side   of  this  account, 

ization. 
^  3.     The  Balance  of  the  Unissued  Capital  Stock  Account  shows  the  par  value 
of  unissued  capital  stock.    It  has  no  value  until  sold,  hence  is  shown  on  the  Balance 
Sheet  as  a  deduction  from  the  authorized  capital  stock. 

256 


ACCOUNTS  PECULIAR  TO  A  CORPORATION  257 

SUBSCRIBERS  TO  CAPITAL  STOCK  ACCOUNT 

§  267.  The  Purpose  of  this  Account  is  to  show  the  amount  due  from  those 
to  whom  the  capital  stock  has  been  sold  on  the  deferred  payment  plan.  This 
account  is  not  needed  when  the  subscribers  pay  for  their  stock  at  the  time  iL.  is 
purchased. 

Debit    the    Siibscrihers    to    Capital  Credit   the   Subscribers   to    Capital 

Stock  Account:  Stock  Account: 

\  I.  For  the  par  value  of  capital  ^  2.  For  cash  or  other  assets  re- 
stock subscribed  but  not  paid  ceived  from  subscribers  to 
for.  apply  on  stock  subscribed. 

^[3.  The  Balance  of  the  Subscribers  to  Capital  Stock  Account  shows  the  amount 
owed  by  subscribers  for  capital  stock  purchased  but  not  paid  for.  It  is  shown  on 
the  Balance  Sheet  as  a  current  asset  unless  the  payments  are  extended  over  a  long 
period,  in  which  case  it  is  shown  as  a  separate  item  below  the  current  assets  and 
above  the  fixed  assets. 

SUBSCRIPTIONS  TO  CAPITAL  STOCK  ACCOUNT 

§  268.  The  Purpose  of  this  Account  is  to  show  the  par  value  of  stock 
subscribed  but  not  issued  because  it  has  not  been  paid  for.  This  account  is  not 
needed  when  the  subscribers  pay  for  their  stock  at  the  time  it  is  purchased. 

Debit  the  Subscriptions  to   Capital  Credit  the  Subscriptions  to  Capital 

Stock  Account:  '  Stock  Account: 

1[  I.  For  the  par  value  of  stock  ^  2.  For  the  par  value  of  capital 
issued    to   subscribers.  stock   subscribed. 

^  3.  The  Balance  of  the  Subscriptions  to  Capital  Stock  Account  shows  the  par 
value  of  capital  stock  subscribed  but  not  issued  because  the  subscribers  have 
not  paid  their  subscriptions.  It  is  shown  on  the  Balance  Sheet  as  an  addition  to 
the  capital  stock  outstanding,  or,  if  no  stock  has  been  issued,  as  the  only  item 
of   proprietorship. 

TREASURY  STOCK  ACCOUNT 

§  269.  The  Purpose  of  this  Account  is  to  show  the  par  value  of  treasury 
stock  owned  by  the  corporation.  This  stock  has  no  connection  with  unissued 
capital  stock,  and  the  facts  recorded  in  this  account  apply  only  to  the  stock  of  the 
corporation  which  has  been  fully  paid  up  and  issued  but  has  come  back  into  the 
possession  of  the  corporation  through  purchase  or  donation  (§  254). 

Debit  the  Treasury  Stock  Account:  Credit  the  Treasury  Stock  Account: 

1[  I.     For  the  par  value  of  the  capital  If  2.     For   the   par  value   of   treasury 

stock  of  the  corporation  pur-  stock  sold, 
chased  by  or  donated  to  it. 

H  3.  The  Balance  of  the  Treasury  Stock  Account  shows  the  par  value  of  the 
treasury  stock  owned  by  the  corporation.  It  is  shown  on  the  Balance  Sheet  as  a 
deduction  from  the  balance  of  the  Capital  Stock  account. 

TREASURY  STOCK  DONATED  ACCOUNT 

§  270.  The  Purpose  of  this  Account  is  to  show  the  par  value  of  stock  do- 
nated to  the  corporation,  and  after  it  is  sold,  the  capitaF resulting  from  its  sale. 
When  the  donation  is  made,  the  Treasury  Stock  account  is  debited,  and  the  Treas- 
ury Stock  Donated  account  is  credited  with  the  par  value.     When  the  stock  is  sold, 


258  ACCOUNTS  PECULIAR  TO  A  CORPORATION 

Cash  or  the  account  which  shows  the  value  of  the  asset  received  for  it,  is  debited, 
and  the  Treasury  Stock  account  is  credited;  if  sold  at  a  discount  or  premium, 
the  difference  between  the  par  value  of  the  stock  and  the  amount  received  is  debited 
or  credited  to  the  Treasury  Stock  Donated  account.  Cash  or  other  assets  which 
come  into  the  possession  of  the  corporation  through  donation  increase  the  capital 
of  the  corporation  and  it  is  necessary  to  record  this  increase. 

Debit  the  Treasury  Stock  Donated  Credit  the  Treasury  Stock  Donated 

Account:  Account: 

Tf  I.     For    the    discount    on    donated  ^  2.     For    the    par    value    of    stock 

stock.  donated    to    the    corporation 

by    the    stockholders. 
\  3.     For    the    premium    on    donated 
stock. 

^  4.  The  Balance  of  the  Treasury  Stock  Donated  Account,  before  the  donated 
stock  is  sold,  shows  the  par  value  of  donated  stock,  and  after  it  is  sold,  shows  the 
capital  resulting  from  the  donation.  It  may  remain  in  this  account,  or  be  trans- 
ferred to  an  account  with  Capital  Surplus.  The  balance  of  the  Treasury  Stock 
Donated  account  should  not  be  closed  into  the  Surplus  account  because  it  is  not 
profit  to  be  withdrawn,  but  capital  supplied  for  a  definite  purpose.  It  is  shown 
on  the  Balance  Sheet  as  a  part  of  the  capital  of  the  corporation  in  connection 
with  the  Capital  Stock  and  Surplus  accounts. 

SURPLUS  ACCOUNT 

§  271.  The  Purpose  of  this  Account  is  to  show  the  undivided  profits: 
that  is,  that  part  of  the  profit  which  has  not  been  distributed  to  stockholders. 
The  par  value  of  the  capital  stock,  issued  and  outstanding,  plus  the  balance  of 
the  Surplus  account  is  the  proprietorship  of  the  corporation  and  should  be  the  same 
as  the  difference  between  the  assets  and  liabilities. 

Debit  the  Surplus  Account:  Credit    the    Surplus    Account: 

T[  I.     At     the     close     of    each     fiscal  %  4.     At     the     close    of    each     fiscal 

period,'  for    the    net    loss    if  period,     for     the     net     profit 

the  operations  of  the  business  if  the  operations  of  the  busi- 

have  resulted  in  a  loss.  ness  have  resulted  in  a  profit. 

^  2.     For    that    part    of    the    profit  ^  5.     For     any     adjustments     during 

which    is    to    be    paid    as    a  the  period  which  increase  the 

dividend   to   the   stockholders  profits  for  a  preceding  period.* 

or    set    aside    for    a    specific 

purpose. 
^  3.     For     any     adjustments     during 

the     period     which     diminish 

the    profits    for    a    preceding 

period.* 

^  6.  The  Balance  of  the  Surplus  Account  shows  the  undivided  profits  result- 
ing from  the  operations  of  the  business.  It  is  shown  on  the  Balance  Sheet  as  a 
part  of  the  capital  of  the  corporation,  being  listed  in  connection  with  the  capital 
stock,  but  as  a  separate  amount;  if  the  business  has  been  operated  at  a  loss  greater 
than  the  balance  of  the  Surplus  account,  this  excess  is  recorded  in  a  Deficit  account. 

*The  amounts  involved  in  this  debit  and  credit  are  usually  small  and  result  from  errors  which 
reduce  or  increase  the  income  of  a  previous  fiscal  period.  It  is  the  better  practice  to  record  such 
items  in  an  account  with  "Adjustment  of  Errors  in  Previous  Periods,"  and  at  the  close  of  the  fiscal 
period,  transfer  from  the  Surplus  account  an  amount  sufficient  to  close  the  adjustment  account. 
This  plan  avoids  recording  small  amounts  in  the  Surplus  account  and  simplifies  auditing. 


ACCOUNTS  PECULIAR  TO  A  CORPORATION  259 

DIVIDEND  PAYABLE  ACCOUNT 

§  272.  The  Purpose  of  this  Account  is  to  show  the  amount  set  aside  by 
the  board  of  directors  for  distribution  as  a  dividend  among  the  stockholders. 
Dividends  are  not  declared  on  treasury  stock  nor  on  unissued  stock.  A  separate 
account  may  be  opened  with  each  dividend,  if  desired,  in  which  case  the  first  one 
is  designated  as  "Dividend  No.  i,"  the  second,  as  "Dividend  No.  2,"  etc. 

Debit  the  Dividend  Payable  Account:  Credit  the  Dividend  Payable  Account: 

\  I.     For  part  or  all  of  the  dividend  *\  2.     For    that    part    of    the    profit 

paid.  which    is    set    aside    by    the 

board  of  directors  as  a  divi- 
dend to  the  stockholders. 

%  3.  The  Balance  of  the  Dividend  Payable  Account  shows  the  amount  of  the 
dividend  declared,  but  not  paid  to  stockholders.  As  a  rule,  the  account  will  be  in 
balance  because  dividend  checks  will  be  issued  to  the  stockholders  as  soon  as  the 
dividend  is  authorized.  However,  in  case  the  address  of  a  stockholder  is  not  known, 
or  if  for  some  reason  the  check  has  not  been  issued,  the  account  will  not  be  in 
balance  and  the  amount  of  the  balance  will  be  a  liability.  If  such  a  liability  exists 
at  the  close  of  a  fiscal  period,  it  is  shown  on  the  Balance  Sheet  as  a  current  liability. 

ORGANIZATION  EXPENSE  ACCOUNT 

§  273.  The  Purpose  of  this  Account  is  to  show  the  cost  of  organizing  the 
corporation,  which  includes  legal  fees,  commission  on  the  sale  of  stock,  salaries 
of  stock  salesmen,  office  rent,  and  other  expenses  incurred  before  the  corporation 
is  ready  to  begin  the  operations  for  which  it  is  organized.  At  the  time  the  corpo- 
ration is  ready  to  begin  business,  the  balance  of  this  account  may  be  regarded 
as  a  permanent  asset  or  as  a  charge  against  Surplus  to  be  distributed  over  a  number 
of  consecutive  fiscal  periods. 

Debit    the    Organization    Expense  Credit    the    Organization    Expense 

Account:  Account: 

^  I.     For    all    expenses    incurred     in  ^  2.     For  that  part  of  the  organiza- 

the   organization   of   the   cor-  tion  expense  written  off  at  the 

poration.  close    of    each    fiscal    period. 

(Surplus  account  is  debited.) 
^  4.  The  Balance  of  the  Organization  Expense  Account,  if  no  part  of  the 
organization  expense  is  written  off  at  the  close  of  each  fiscal  period,  shows  the 
asset  resulting  from  the  expenditures  in  connection  with  the  organization  of  the 
corporation;  if  a  part  is  written  off  each  fiscal  year,  the  balance  will  show  the 
amount  remaining  as  an  asset.  Organization  expense  is  shown  as  a  separate  item 
on  the  asset  side  of  the  Balance  Sheet. 

The  Commissioner  of  Internal  Revenue  has  ruled  that  organization  expense  is  not  an  operating 
cost  deductible  from  the  income  of  the  corporation;  hence,  if  any  part  is  written  off  at  the  close  of 
each  fiscal  period,  it  is  necessary  to  debit  it  to  the  Surplus  account.  When  organization  expense 
is  written  off  over  a  number  of  fiscal  periods,  the  amount  to  be  written  off  each  year  and  the  number 
of  fiscal  periods  covered  by  the  process  are  determined  by  the  Board  of  Directors  or  management 
of  the  corporation. 

BONDS  PAYABLE  ACCOUNT 

§  274.  The  Purpose  of  this  Account  is  to  show  the  amount  of  the  indebted- 
ness resulting  from  bonds  issued  by  the  corporation.  These  bonds  are  usually 
secured  by  a  mortgage  on  real  estate  or  personal  property  (§  259). 

Debit  the  Bonds  Payable  Account:  Credit  the  Bonds  Payable  Account: 

\  I.     For    the    face    value    of    bonds  ^f  2.     For    the    face    value    of    bonds 

paid  by  the  corporation.  issued   by    the   corporation. 


260  ACCOUNTS  PECULIAR  TO  A  CORPORATION 

^  3.  The  Balance  of  the  Bonds  Payable  Account  shows  the  face  value  of  the 
bonds  owed  by  the  corporation.  It  is  shown  on  the  Balance  Sheet  as  a  fixed  lia- 
bility. 

When  bonds  are  sold  at  less  than  par,  the  discount  is  debited  to  a  Discount  on  Bonds  account; 
when  they  are  sold  at  more  than  par,  the  premium  is  credited  to  a  Premium  on  Bonds  account. 
In  either  case,  the  account  which  shows  the  difference  between  the  par  value  and  the  seUing  price 
will  appear  on  the  Statement  of  Profit  and  Loss  as  an  non-operating  income  or  loss. 

GOODWILL  ACCOUNT 
§  275.  The  Purpose  of  this  Account  is  to  show  the  value  of  goodwill 
purchased  by  the  corporation.  "Goodwill"  refers  to  the  difference  between  the 
purchase  price  and  the  book  value  of  the  net  assets  of  a  going  concern;  it  is  recorded 
as  goodwill  only  on  the  books  of  the  buyer.  Goodwill  is  of  the  same  nature  as 
organization  expense,  and  may  be  regarded  as  a  permanent  asset  or  may  be 
written  off  over  a  number  of  consecutive  fiscal  periods. 

Debit    the    Goodwill    Account:  Credit   the   Goodwill   Account: 

^  I.     For   the    value    of     the    good-  H  2.     For  that  part    of    the    goodwill 

will    purchased    at    the    time  written  off  at  the  close  of  each 

a  going  business  is  taken  over.  fiscal    period.       (Surplus    ac- 

count  is  debited.) 

H  3.  The  Balance  of  the  Goodwill  Account,  if  no  part  of  the  goodwill  is  written 
off  at  the  close  of  each  fiscal  period,  shows  the  cost  value  of  the  goodwill  purchased 
by  the  corporation;  if  a  part  is  written  off  each  fiscal  year,  the  balance  will  show 
the  value  of  the  goodwill  at  the  conclusion  of  the  business  year.  Goodwill  is  shown 
as  a  separate  item  on  the  asset  side  of  the  Balance  Sheet. 

Goodwill  may  be  illustrated  as  follows:  C.  A.  Popp  owns  and  operates  a  retail  shoe  store. 
He  wishes  to  retire  from  active  management,  and  A.  J.  Downey,  D.  F.  Ford,  Robert  McDowell, 
and  _C._W.  Smith,  four  of  the  clerks,  decide  to  incorporate  the  business  and  take  over  the  larger  part 
of  his  interest.  The  Balance  Sheet  prepared  at  this  time  shows  the  net  assets  of  the  business  to 
be  worth  $92,500.00,  but  the  incorporators  agree  to  give  Mr.  Popp  $100,000.00  for  the  business. 
The  $7,500.00  paid  Mr.  Popp  in  excess  of  the  actual  value  of  the  assets  will  be  recorded  on  the 
books  of  the  corporation  in  the  Goodwill  account. 

QUESTIONS 

1.  What  accounts  are  needed  in  connection  with  the  investment  in  a  corporation? 

2.  What  accounts  will  be  debited  and  credited  in  the  opening  entries  of  a  cor- 

poration in  which  the  capital  stock  is  $60,000.00  (a)  if  all  stock  is  subscribed 
and  paid  for  in  cash,  and  (b)  if  only  $50,000.00  is  subscribed  and  paid  for? 

3.  What  are  the  two  methods  of  recording  capital  stock?     Explain  each. 

4.  If  you  were  keeping  books  for  a  corporation  and  the  stockholders  donated 

common  stock  having  a  par  value  of  $10,000.00,  what  accounts  would  you 
debit  and  credit? 

5.  If  the  common  stock  donated  in  question  No.  4  were  sold  for  $8,500.00  cash, 

what  accounts  would  you  debit  and  credit? 

6.  What  accounts  would  be  debited  and  credited  if  a  corporation  with  a  capital 

stock  of  $100,000.00  sells  on  the  installment  plan  only  $75,000.00  of  the 
stock  at  the  beginning? 

7.  Why  does  the  law  usually  forbid  a  corporation  from  purchasing  its  own  stock 

and  retaining  ownership  of  it  for  an  indefinite  period? 

8.  What  is  the  difference  between  the  capital  and  capital  stock  of  a  corporation? 

Give  an  example. 

9.  W^hy  is  the  net  profit  or  loss  resulting  from  the  operations  of  a  corporation 

during  a  fiscal  period,  transferred  to  the  Surplus  account  and  not  to  the 
Capital  Stock  account? 
10.     If  the  amount  shown  by  the  Goodwill  account  is  $10,000.00  and  it  is  desired 
to  close  this  out  over  a  period  of  five  years,  what  entry  will  be  required  at 
the  close  of  each  year? 


Chapter  XXVII 

BOOKS  OF  ACCOUNT  PECULIAR  TO  A  CORPORATION 

The  Purpose  of  this  Chapter  is  to  explain  and  illustrate  the  books  of  ac- 
count required  to  record  the  transactions  completed  during  the  organization  of 
a  corporation  and  those  performed  by  the  officers  in  connection  with  the  corporate 
affairs.  The  books  needed  to  record  the  transactions  completed  in  the  regular 
operations  of  a  business  owned  and  operated  by  a  corporation  are  the  same  as 
those  needed  to  record  such  transactions  for  a  like  business  owned  and  operated 
by  an  individual  or  by  partners.  The  books  of  account  required  to  record  trans- 
actions affecting  the  corporate  affairs  consist  of  the  subscription  book,  subscribers' 
journal,  subscribers'  ledger,  stock  certificate  book,  stockholders'  journal,  stock- 
holders' ledger,  stock  transfer  book,  and  minute  book. 


§  276.     Subscription  Book.     The  state 
corporations  usually  requires  that  a  certain  per 


SUBSCRIPTION  LIST 

We,    the   undersigned,    hereby   subscribe   for    the   number   of 

shares  of  stock  in  the  corporation   known  as. . 

J.   A.   Whitney  &   Co. set  ODOosite  our  names 

ame                      upon   demand. 

Date 

No.  of 
Shares 

Par  Value 

Signature 

h 

7- 

/SO 

/-s-o 

^  /S,  (POO. 
2l0  00 

(?  (2.  j)c^^ 

n 

/,7  oo 

0<    cy    yP'Tx-'Y-^t-y 

sc 

S,  C  0  c 

cL   -J--  ^Xajju/ 

s 

S'oo 

/^.vT /^^^=--'^-'^^^— -" 

/  0 

/.ooo 

7 

V- 

^  00 
>o  o 

',4  OD 

\5 

\,5  0  0. 

X.  ^  -cQ-c^-^ 

III.  No.  105,  Page  of  Subscription  Book. 

261 


law  governing  the  organization  of 
cent  of  the  capital  be  paid  in  when 
application  is  made  for  the 
charter.  It  is  necessary,  there- 
fore, for  the  organizers  to  secure 
subscriptions  to  the  capital  stock 
and  payment  for  part  or  all  of 
the  stock  subscribed.  These 
subscriptions  are  usually  ob- 
tained by  having  the  proposed 
stockholders  sign  a  subscription 
list,  ruled  similar  to  Illustration 
No.  105.  The  subscription  book 
is  made  up  by  binding  the  sub- 
scription lists;  these  lists  are 
usually  punched  to  fit  a  binder. 
The  information  given  in  the 
subscription  book  provides  a 
basis  for  recording  the  trans- 
actions with  the  subscribers. 
The  signature  of  a  proposed 
stockholder  to  the  subscription 
list  binds  him  to  pay  for  the 
number  of  shares  mentioned  in 
connection  with  his  subscription ; 
hence,  the  subscription  list  is  the 
contract  between  the  corpora- 
tion and  the  subscriber.  For 
this  reason,  the  subscription 
list  or  the  subscription  book 
should  be  kept  in  a  safe  place 
until  the  subscriptions  have 
been  paid  in  full  and  the  stock 
issued  as  per  contract. 


262 


SUBSCRIBERS'  JOURNAL 


§  277.  The  Subscribers'  Journal  contains  a  record  of  the  subscriptions 
for  stock;  the  information  for  each  entry  is  obtained  from  the  subscriptions  as 
shown  on  the  subscription  Hsts  which  compose  the  subscription  book.  The  ruHng 
should  be  so  arranged  that  the  subscription  of  a  subscriber  may  be  recorded  on 
one  horizontal  line.  Space  should  be  provided  for  the  date,  name  of  the  subscriber, 
his  address,  number  of  shares  subscribed,  par  value  of  the  same,  and  amount  columns 
for  common  and  preferred  stock.  Each  subscriber  is  debited  in  the  subscribers' 
journal  with  the  par  value  of  the  stock  he  has  purchased;  at  the  end  of  the  month, 
the  Subscribers  to  Capital  Stock  account  in  the  general  ledger  is  debited  and  the 
Subscriptions  to  Capital  Stock  account  credited    for  the  total  subscriptions. 

Illustration  No.  io6  shows  the  rulingjn  skeleton  form  for  a  subscribers'  journal. 
If  transactions  of  this  nature  are  not  numerous,  the  entries  may  be  made  in  the 
general  journal,  in  which  case  Subscribers  to  Capital  Stock  account  will  be  debited 
and  Subscriptions  to  Capital  Stock  account  credited  for  the  par  value  of  the  sub- 
scriptions recorded  in  each  entry. 


Date 


Name 


Address 


No. 
Shares 


Par 
Value 


Common 


Preferred 


Illustration  No.  io6.  Ruling  for  a  Subscribers'  Journal. 

§  278.  The  Subscribers'  Ledger  contains  accounts  with  those  subscribers 
who  purchase  stock  on  the  deferred  payment  or  installment  plan;  when  a  sub- 
scriber pays  cash  for  his  stock  at  the  time  he  subscribes  for  it,  no  account  is  needed 
with  him  in  the  subscribers'  ledger.  The  usual  ledger  ruling  is  sufficient  to  record 
the  facts  as  all  the  information  needed  is  the  debit  to  a  subscriber's  account  for 
stock  subscribed  by  him,  and  the  credit  to  his  account  for  cash  received  as  part 
payment  of  the  same.  Since  each  debit  to  accounts  in  this  ledger  is  included  in 
the  total  debit  to  the  Subscribers  to  Capital  Stock  account  in  the  general  ledger, 
the  accounts  in  the  subscribers'  ledger  are  controlled  by  this  account. 

§  279.  The  Stock  Certificate  Book  is  a  bound  or  loose-leaf  book  contain- 
ing stock  certificates,  each  certificate  attached  to  a  stub  with  space  for  recording 
the  information  written  in  the  certificate.  When  a  subscriber  pays  for  his  stock, 
he  is  entitled  to  a  certificate  showing  his  interest  in  the  corporation;  this  interest 
is  indicated  by  the  number  of  shares  and  the  par  value  of  each.  Illustration  No. 
107  shows  a  stock  certificate  filled  out  ready  for  delivery  to  the  purchaser,  and  the 
attached  stub  with  the  necessary  information  in  regard  to  the  certificate.  When 
this  certificate  is  removed  from  the  stub  and  given  to  the  purchaser,  he  will  retain 
it  as  evidence  of  his  interest  in  the  corporation.     The  information  on  this  stub 


Ctrllficalt  S^a.  Z/' 

f„     -^g^^^^e/    f/^J Shorts 

hsaed  to 


g^-^  '-^, 


Vale '-'^t^^ 


liinsferred  from 


Cerlff^cate 


No.  Original 
Shates 


// 


Titctimd  Cc'lifkale  SKo.    / ,7 

for    ^^^4>:>-^ Shir, 

this    ^A/    _rfjv  o/-.^^a!2_ /9_ 


^a^r>-zij!^  cc^^^y,^,,,^.^^ 


'^*^4*^  r*^'^g^g^^.*'X^^^^a'~K'''^*^'^'?^''rg^ 


-***i**?^"tf***^'i 


SHARES  $100.00  EACH 


I   ^e.Z^ &l;aif  a  ^^ 

I  SlliB  (EprttfiPB  That  ^^^gT^W;?^-^  Cv^^^V^'^^gg;^^ 

i    is  the  owner  nf  ^^^g^- 


.Shares  of  tlie  Capital  Stock  of  % 


I  3(.  A.  1il|itnpg  $c  (En.  j 

^    transferable  only  on  the  Books  of  the  Corporation  in  person  or  by  cAiiorney  on  surrender  of  this  Certificate.    ^ 


3n   Bilnf  BO  fflhf  fff .  "r  rfu'y  joMonscJ  officers  of  this  Corporation  hJbe  hereanto  subicribed  their 


f    the  Corcantr  Seal  lo  l>e  hereto  affixed  a/- 


:^^^2^^L.day  of-Jr 


d^^_  A.'D.t9  _ 


Steretary. 

Illustration  No.  107,  Stock  Certificate  Attached  to  Stub. 


ja<*~-jtf^fcl  t 


STOCKHOLDERS'  JOURNAL 


263 


9oT  oalur  rrrrinrik  - 


—hertby  sell,  tramfcr  attd 


iiicJ    and    hereby    author 


I  make  the  txcessary  trammer  upon  the  Books  1^  the  Corpor 


^and  afid  seat  tht. 


fa) 


Witnessed  by 

(10) 


will  be  transferred,  either  direct  or  through  the  stockholders'  journal,  to  an  ac- 
count with  him  in  the  stockholders'  ledger.     The  stockholder  who  pays  for  his 

subscription  on  the  deferred  payment  or  install- 
ment plan  receives  a  receipt  for  each  payment; 
these  receipts  are  surrendered  when  the  subscrip- 
tion is  paid  in  full  and  the  certificate  of  stock 
issued. 

EXPLANATION.  The  illustration  at  the  left 
shows  the  printed  form  on  the  back  of  the  certificate,  to 
be  used  by  the  owner  for  instructions  in  regard  to  transfer 
of  title  when  the  stock  is  sold.  Should  James  O.  Whitman 
sell  five  shares  to  Ernest  L.  Musselman  on  October  23,  the 
spaces  would  be  filled  out  as  follows:  i,  "I";  2,  "Ernest  L. 
Musselman";  3,  "Five  (5)";  4,  "J.  S.  Martin"  or  some 
other  officer  of  the  corporation  authorized  to  make  transfer; 
5,  "my";  6,  "23d";  7,  "October";  8,theyear;  9,  "James 
O.  Whitman";  10,  the  signature  of  a  disinterested  person 
who  would  sign  as  witness. 

Illustration  No.  108,  Form  on  Back  of  Stock  Certificate. 
§  280.  The  Stockholders'  Journal  contains  a  record  of  the  stock  certificates 
issued;  it  is  sometimes  referred  to  as  a  corporation  journal.  The  information  for 
the  transactions  recorded  in  this  journal  is  obtained  from  the  stubs  of  the  stock 
certificates  issued.  The  ruling  should  be  such  that  all  the  information  in  regard 
to  each  certificate  may  be  recorded  on  one  horizontal  line.  The  purpose  of  this 
journal  is  to  provide  a  posting  medium  for  the  accounts  in  the  stockholders'  ledger. 
If  the  information  in  the  stockholders'  ledger  is  obtained  direct  from  the  stock 
certificate  stub,  the  stockholders'  journal  is  not  needed. 

§  281.  The  Stockholders'  Ledger  contains  an  account  with  each  stock- 
holder. The  information  recorded  in  each  account  shows  the  number  of  shares 
owned  by  the  stockholder,  the  par  value  of  the  stock,  and  the  class  of  stock,  that 
is,  whether  common  or  preferred.  The  Capital  Stock  account  in  the  general 
ledger  is  a  controlling  account  for  the  accounts  in  the  stockholders'  ledger.  The 
information  recorded  in  the  account  with  a  stockholder  is  posted  direct  from  the 
stock  certificate  stub,  or  from  the  stockholders'  journal.  Illustration  No.  109 
shows  an  account  with  a  stockholder  in  the  stockholders'  ledger. 


(,>'€Z^^^^^^L..£..<i^  (^  JiK^ 


Date 

Cer. 

■No.  of 
Shares 
issued 

No  of 
Shares 
trans. 

To  "Whom  Transferred  and  other  Exjianations 

Debit 

Credit 

/^ 

^ 

i/O  0 

/  0  0  0 

/  ilo  0 

/  J^O  0 

/  iCo  0 

/ 

■^ 

.y 

/      0     0     L' 

Illustration  No.  109,  Stockholders'  Ledger. 

§  282.  The  Stock  Transfer  Journal  contains  a  record  of  the  transactions 
with  stockholders  which  relate  to  the  transfer  of  stock  in  a  corporation  owned 
by  them;  the  information  is  obtained  from  the  stub  of  the  stock  certificate.  If 
the  information  given  on  the  stub  of  the  certificate  is  posted  direct  to  the  account 
with  the^stockholder  in  the  stockholders'  ledger,  the  stock  transfer  journal  is  not 


264 


MINUTE  BOOK 


necessary.    In  several  states  the  law  requires  that  the  corporation  maintain  a  stock 
transfer  book;    Illustration  No.   no  shows  the  form  usually  used. 

When  a  stockholder  wishes  to  withdraw  his  investment  in  a  corporation,  he  seeks  a  buyer  for 
his  stock  and  sells  his  stock  to  him.  The  corporation  has  nothing  to  do  with  this  transaction 
except  to  transfer  the  ownership  of  the  stock  by  closing  the  account  in  the  stockholders'  ledger 
with  the  former  stockholder,  and  opening  an  account  with  the  new  stockholder.  The  information 
in  regard  to  the  transaction  is  given  the  corporation  by  the  transfer  of  the  certificate ;  space  is  provided 
on  the  back  of  the  certificate  for  a  record  of  this  transfer.  When  a  certificate  is  issued  to  the  new 
stockholder,  the  former  certificate  will  be  surrendered  to  the  corporation,  and  attached  to  the 
stub  from  which  it  was  detached  or  filed  for  future  reference.  If  a  stockholder  sells  only  a  part  of 
his  stock,  the  old  certificate  is  surrendered,  and  two  new  certificates  issued,  one  to  each  stockholder 
for  the  number  of  shares  he  owns. 


Date 


Serial  No.  of 
Canceled 
Certificate 


No.  of 
Shares 


By  Whom 
Surrendered 


To  Whom 
Issued 


Serial  No. 

of  New 
Certificate 


No.  of 

Shares 


No.  and  Face  Value  of 
Stamps 


Val. 


$1 


Etc. 


Illustration  No.  no,  One  Form  of  Ruling  for  a  Stock  Transfer  Book. 

§  283.  Minute  Book.  The  affairs  of  a  corporation  are  controlled  by  the 
stockholders  because  they  are  the  owners  of  the  business.  The  stockholders  elect 
from  their  number  a  board  of  directors  which,  in  turn,  elects  officers  to  take  care 
of  the  details  of  the  operations  of  the  business.  All  business  transacted  by  the 
stockholders  and  by  the  board  of  directors  is  recorded  in  the  minute  book  by  the 
secretary  of  the  corporation.  No  special  ruling  is  required  for  the  information 
recorded  in  the  minute  book,  but  the  minutes  of  each  meeting  should  be  in  con- 
secutive order  for  ready  reference. 


3- 


5- 
6. 


10. 


QUESTIONS 

What  is  the  difference  between  a  subscriber  and  a  stockholder? 

(a)  What  evidence  does  a  stockholder  have  that  he  has  an  interest  in  the 
capital  of  the  corporation?  (b)  What  evidence  does  a  partner  have  that 
he  has  an  interest  in  the  capital  of  a  partnership? 

(a)  How  will  a  stockholder  determine  the  value  of  his  investment  in  a  cor- 
poration, as  evidenced  by  the  certificate  of  stock  which  he  holds?  (b)  How 
will  a  partner  ascertain  the  value  of  his  interest  in  a  partnership? 

(a)  What  is  the  purpose  of  the  subscription  list?  (b)  In  what  way  is  the 
subscription  list  connected  with  the  subscription  book? 

What  is  the  connection  between  the  subscribers'  journal  and  the  subscribers' 
ledger? 

W^hat  account  in  the  general  ledger  controls  the  accounts  in  the  subscribers' 
ledger? 

(a)  What  is  the  connection  between  the  stock  certificate  and  the  stub?  (b) 
How  may  canceled  certificates  be  filed?  (c)  Why  would  a  stockholder 
wish  to  have  his  certificate  canceled? 

(a)  What  is  the  connection  between  the  stockholders'  journal  and  the  stock- 
holders' ledger?  (b)  What  account  in  the  general  ledger  controls  the  ac- 
counts in  the  stockholders'  ledger? 

If  a  stockholder  who  owns  ten  shares  of  stock  sells  five  shares  to  one  who  is 
not  a  stockholder  in  the  corporation,  what  is  the  method  of  procedure  to 
show  the  transaction  properly  recorded  on  the  books  of  the  corporation? 

Why  should  the  president,  or  presiding  officer,  and  the  secretary  both  sign 
the  minutes  of  each  meeting  of  the  board  of  directors  as  recorded  in  the 
minute  book? 


Chapter  XXVIII 

OPENING  ENTRIES  FOR  A  CORPORATION 

The  Purpose  of  this  Chapter  is  to  explain  the  opening  entries  for  a  corpor- 
ation. The  method  of  selHng  the  capital  stock  of  the  corporation  determines  the 
journal  entries  necessary  to  record  the  investment;  these  entries  are  discussed  in 
this  chapter  under  the  following  titles:  (i)  authorized  capital  stock  sold  for  cash 
or  cash  and  other  assets;  (2)  part  of  authorized  capital  stock  sold  for  cash  or  cash 
and  other  assets;  (3)  part  or  all  of  the  authorized  capital  stock  sold  for  the  purpose 
of  continuing  the  operations  of  a  going  business;  and  (4)  stock  sold  on  the  install- 
ment plan. 

§  284.  Authorized  Capital  Stock  Sold  at  Time  of  Organization.  When 
all  stock  is  sold  at  the  time  the  corporation  is  organized,  Cash  or  Cash  and  some 
other  asset  accounts  are  debited  and  the  Capital  Stock  account  credited  for  the 
amount  of  the  capital  stock  which  the  corporation  is  authorized  to  issue;  if  the 
value  of  the  assets  received  is  not  equivalent  to  the  par  value  of  the  stock  issued, 
the  difference  is  debited  to  an  account  with  Discount  on  Capital  Stock  or  credited 
to  a  Premium  on  Capital  Stock  account. 

If  the  charter  granted  the  Central  Plumbing  Company  authorizes  the  issuing 
of  $50,000.00  common  stock  and  all  of  this  is  sold  for  cash,  the  entry  in  journal 
form  will  be  as  follows: 


Cash 

Capital  Stock 
Cash  received  for  authorized  capital  stock  issued. 


50,000 


50,000  00 


When  this  entry  is  posted,  the  authorized  capital  stock  will  appear  on  the  credit  side  of  the 
Capital  Stock  account.  The  fact  that  no  unissued  capital  stock  is  recorded  in  the  ledger  indicates 
to  each  stockholder  that  the  $50,000.00  is  the  full  amount  of  stock  which  the  corporation  is  author- 
ized to  issue. 

If  the  charter  of  the  Central  Plumbing  Company  authorizes  the  incorporators 
to  issue  $25,000.00  common  stock  and  $25,000.00  preferred  stock  and  cash  has 
been  received  in  payment  for  all  the  stock,  the  entry  in  journal  form  will  be  as 
follows : 


Cash 

Capital  Stock,  Common 

Capital  Stock,  Preferred 
Cash  received  for  authorized  capital  stock  issued. 


50,000 


25,000 
25,000 


When  this  entry  is  posted,  the  ledger  will  show  the  same  facts  as  when  the  entry  first  illustrated 
was  posted,  e.xcept  each  class  of  authorized  capital  stock  will  be  recorded  in  a  separate  account. 

If,  at  the  time  the  Central  Plumbing  Company  was  organized,  it  was  agreed 
to  issue  $5,000.00  of  stock  to  a  subscriber  in  exchange  for  land  which  he  owns  and 
cash  was  received  for  the  remainder  of  the  capital  stock,  the  entry  in  journal  form 
will  be  as  follows: 


Cash 
Land 

Capital  Stock 
Cash  and  land   received   for  authorized   capital   stock 
issued. 


45.000:00 
5,000  00 


50,000 


When  this  entry  is  posted,  the  ledger  will  show  the  same  facts  as  when  the  first  entry  was 
posted,  except  the  assets  received  will  be  shown  in  two  accounts,  one  with  Cash  and  the  other  with 

265 


266 


OPENING  ENTRIES  FOR  A  CORPORATION 


Land.  If  the  same  conditions  existed  and  the  stock  were  equally  divided  between  the  common  and 
preferred  as  in  the  second  entry,  the  entry  would  be  the  same  as  the  above,  except  that  there  would 
be  two  credits  to  show  the  two  classes  of  stock. 


§  285.     Part  of  Authorized  Capital  Stock  Sold  at  Time  of  Organization. 

When  only  a  part  of  the  authorized  capital  stock  is  sold  at  the  time  the  corpor- 
ation is  organized,  the  authorized  capital  stock  should  be  recorded;  otherwise  its 
value  will  not  be  shown  in  the  ledger  and  the  stockholders  will  have  no  means  of 
knowing  the  par  value  of  the  capital  stock  which  the  corporation  can  issue,  with- 
out referring  to  the  charter.  This  is  usually  recorded  by  an  entry  in  which  the 
Unissued  Capital  Stock  account  is  debited  and  the  Capital  Stock  account  credited 
for  the  par  value  of  the  capital  stock  which  the  corporation  is  authorized  to  issue. 
If  the  charter  authorizes  the  issuing  of  both  common  and  preferred  stock,  the  par 
value  of  each  will  be  shown  in  a  separate  Capital  Stock  account  and  the  par  value 
of  the  authorized  capital  stock  will  also  be  debited  to  separate  Unissued  Capital 
Stock  accounts.  When  the  authorized  capital  stock  is  recorded  in  the  ledger,  the 
stockholders  will  know  the  authorized  capital  stock  and  the  par  value  of  that  which 
is  not  issued,  without  referring  to  the  charter. 

If  the  Citizens'  Motor  Car  Company  is  organized  with  the  authority  to  issue 
$100,000.00  common  stock  and  only  $75,000.00  is  sold  for  cash  at  the  time  of  organ- 
ization, the  entries  to  record  the  authorized  capital  stock  and  the  stock  sold  will 
appear  in  journal  form  as  follows: 

Unissued  Capital  Stock 

Capital  Stock 
Authorized  capital  stock  of  Citizens'  Motor  Car  Co. 

Cash 

Unissued  Capital  Stock 
Cash  received  for  750  shares  of  stock  issued. 

When  these  entries  are  posted,  the  par  value  of  the  authorized  capital  stock  and  of  the  stock 
issued  will  be  recorded  in  the  ledger.  Each  stockholder  will  know  from  the  Balance  Sheet  that  the 
corporation  has  the  authority  to  sell  and  issue  additional  stock  to  the  value  of  $25,000.00. 

If  the  incorporators  of  the  Citizens'  Motor  Car  Company  are  authorized  to 
issue  both  common  and  preferred  stock  in  equal  amounts  and  $75,000.00  cash  is 
received  for  $40,000.00  preferred  and  $35,000.00  common  stock  at  the  time  of 
organization,   the  entries  in  journal  form  will  appear  as  follows: 


100,000 

00 

100,000 

75,000 

00 

75,000 

Unissued  Capital  Stock,  Common 
Unissued  Capital  Stock,  Preferred 

Capital  Stock,  Common 

Capital  Stock,  Preferred 
Authorized  capital  stock  of  Citizens'  Motor  Car  Co. 


Cash 

Unissued  Capital  Stock,  Common 
Unissued  Capital  Stock,  Preferred 

Cash  received  for  350  shares  of  common  and  400 

shares  of  preferred  stock  issued. 


50,000 
50,000 


75,000 


50,000 
50,000 


35-000 
40,000 


When  these  entries  are  posted,  the  ledger  will  show  $50,000.00  common  stock  authorized  and 
$35,000.00  issued,  and  $50,000.00  preferred  stock  authorized  and  $40,000.00  issued. 

If,  at  the  time  of  the  organization  of  the  Citizens'  Motor  Car  Company,  it 
is  agreed  to  issue  $5,000.00  of  common  stock   and   $5,000.00   of   preferred   stock 


OPENING  ENTRIES  FOR  A  CORPORATION 


267 


to  one  of  the  subscribers  for  land  which  he  owns  and  cash  is  received  for  $30,000.00 
common  stock  and  $35,000.00  preferred  stock,  the  entries  in  journal  form  will 
appear  as  follows: 


Unissued  Capital  Stock,  Common 
Unissued  Capital  Stock,  Preferred 

Capital  Stock,  Common 

Capital  Stock,  Preferred 
Authorized  capital  stock  of  Citizens'  Motor  Car  Co. 

Cash 
Land 

Unissued  Capital  Stock,  Common 

Unissued  Capital  Stock,  Preferred 
Cash  and  land  received  for  350  shares  of  common  and 
400  shares  of  preferred  stock  issued. 


50,000 
50,000 


65,000 
10,000 


50,000 
50,000 


35.000 
40,000 


When  these  entries  are  posted,  the  ledger  will  show  the  same  facts  as  in  the  two  preceding 
entries,  except  that  $10,000.00  of  the  assets  received  will  be  recorded  in  the  Land  account  and 
§65,000.00  in  the  Cash  account. 

§  286.  Corporation  Organized  to  Continue  a  Going  Business.  A  going 
business  is  one  which  is  in  operation.  A  corporation  organized  to  continue  such  a. 
business  will  purchase  the  assets  and  assume  the  liabilities  of  the  business.  It  is 
customary  to  close  the  accounts  in  the  ledger  of  a  going  business  before  making  the 
opening  entries  for  the  corporation.  The  entries  required  are  usually  raade  in  the 
following  order:  (i)  to  close  the  accounts  in  the  ledger  of  the  concern  which  is  being 
taken  over  by  the  corporation;  (2)  to  record  the  authorized  capital  stock  of  the 
corporation;  (3)  to  record  the  assets  received  in  payment  for  the  stock  issued; 
and  (4)  to  record  the  liabilities  assumed  by  the  corporation. 

The  entries  required  in  connection  with  the  purchase  of  a  going  business  by  a 
corporation  are  illustrated  in  connection  with  the  following:  J.  A.  Smith  owns 
and  operates  a  retail  shoe  business,  but  wishes  to  retire  from  active  management. 
R.  W.  Wiley,  C.  U.  Moon,  J.  H.  Patterson,  and  P.  A.  Carlson,  four  of  his  employees, 
decide  to  purchase  the  business  from  Mr.  Smith  and  continue  its  operation  as  a 
corporation;  Mr.  Smith  agrees  to  accept  stock  in  the  corporation  for  his  interest 
in  the  business.  Each  of  the  other  four  incorporators  agrees  to  purchase  one  hundred 
shares  at  par.  The  necessary  capital  is  subscribed,  application  made  for  a  charter, 
and  the  charter  granted  on  January  i,  192.  ..  Stock  is  issued  to  Mr.  Smith  for 
his  interest  and,  on  receipt  of  cash  in  payment,  to  the  other  four  incorporators. 
The  capital  stock  of  the  corporation  is  $50,000.00  consisting  of  one  thousand 
shares,  par  value  $50.00  each;  the  name  of  the  corporation  is  the  People's  Shoe 
Company.  The  post-closing  Trial  Balance  of  the  business  owned  and  operated  by 
J.  A.  Smith,  on  December  31  is  as  follows: 

J.  A.  SMITH 
Post-closing  Trial  Balance,  December  31.  192.  


Cash 

Accounts  Receivable.  . 

Reserve  for  Doubtful  Accounts 

Office  Equipment 

Reserve  for  Dep.  of  Office  Equipment 

Store  Fixtures 

Reserve  for  Dep.  of  Store  Fixtures. . . 

Notes  Payable 

Accounts  Payable 

J.  A.  Smith,  Capital 

Mdse.  Inventory,  December  31,  192. . 


13,500.00 
1,750.00 

250.00 

1,500.00 


7,602.50 
24,602 . 50 


27  50 

25.00 

300 . 00 

3,300.00 

12,450.00 

8,500.00 

24,602.50 


268 


OPENING  ENTRIES  FOR  A  CORPORATION 


The  entries  in  journal  form  to  close  the  accounts  on  the  ledger  of  J.  A.  Smith 
will  appear  as  follows: 


People's  Shoe  Company 

Cash 

Accounts  Receivable 

Office  Equipment 

Store  Fixtures 

Mdse.  Inventory,  Dec.  31 
To  record  the  sale  of  the  assets  of  the  business  to  the 
People's  Shoe  Company. 

Reserve  for  Doubtful  Accounts 
Res.  for  Dep.  of  Office  Equipment.' 
Res.  for  Dep.  of  Store  Fixtures 
Notes  Payable 
Accounts  Payable 

People's  Shoe  Company 
To  record  the  transfer  of  the  reserves  and  liabilities  of 
the  business  to  the  People's  Shoe  Company. 

Stock,  People's  Shoe  Company 

People's  Shoe  Company 
To  record  the  receipt  of  capital  stock  from  the  People's 
Shoe  Company  in  payment  of  amount  due  from  them. 


J.  A.  Smith,  Capital 

Stock,  People's  Shoe  Company  8,500 

To  record  the  acceptance  by  J.  A.  Smith  of  170  shares 
of  the  stock  of  the  People's  Shoe  Company  in  payment 
for  his  interest  in  the  business. 
When  these  entries  are  posted,  each  of  the  asset  accounts  will  be  closed  by  an  entry  on  the 
credit  side,  and  each  of  the  liability  and  reserve  accounts  and  the  proprietorship  account,  by  an 
entry  on  the  debit  side.    The  books  of  J.  A.  Smith  are  thus  completely  closed. 

The  entries  in  journal  form  to  open  the  books  will  appear  as  follows: 


24,602 


27 

25 

300 

3.300 

12,450 


8,500 


8,500 


50 


13,500 

1,750 

250 

1,500 

7,602 


16,102 


8,500 


50 


Unissued  Capital  Stock 

Capital  Stock 
To  record  the  authorized  capital  stock  of  the  People's 
Shoe  Company. 

Cash 

Accounts  Receivable 
Office  Equipment 
Store  Fixtures 
Mdse.  Inventory,  Jan.  i 
J.  A.  Smith,  Vendor 
To  record  the  purchase  of  the  assets  of  J.  A.  Smith. 

J.  A.  Smith,  Vendor 

Reserve  for  Doubtful  Accounts 

Res.  for  Dep.  of  Office  Equipment 

Res.  for  Dep.  of  Store  Fixtures 

Notes  Payable 

Accounts  Payable 
To  record  the  reserves  taken  over  and  the  liabilities 
assumed  from  J.  A.  Smith. 

J.  A.  Smith,  Vendor 

Unissued  Capital  Stock 
To  record  the  issue  of  170  shares  of  stock  to  J.  A.  Smith 
in  payment  for  his  business. 

Cash 

Unissued  Capital  Stock 
To  record  the  issue  of  400  shares  of  stock  upon  receipt 
of  cash  in  payment,  to  R.  W.  Wiley,  C.  U.  Moon,  J.  H. 
Patterson,  and  P.  A.  Carlson,  each  100  shares. 


50,000 


13,500 

1,750 

250 

1,500 

7,602 


16,102 


8,500 


50 


50,000 


24,602 


27 

25 

300 

3,300 

12,450 


8,500 


50 


OPENING  ENTRIES  FOR  A  CORPORATION 


269 


When  these  entries  are  posted,  the  authorized  capital  stock  will  be  recorded  on  the  books  of 
the  corporation  as  a  credit  to  the  Capital  Stock  account;  the  unissued  capital  stock  will  be  shown 
by  the  debit  balance  of  the  Unissued  Capital  Stock  account;  the  assets,  liabilities,  and  reserves 
taken  over  from  J.  A.  Smith  will  be  recorded  in  the  proper  accounts;  and  the  account  with  J.  A. 
Smith,  Vendor,  which  shows  in  summary  form  the  assets  purchased,  the  liabilities  assumed,  the 
reserves  taken  over,  and  the  stock  issued  in  payment  for  the  net  assets,  will  be  in  balance.  The 
books  of  the  corporation  are  now  ready  for  the  recording  of  current  transactions. 

§  287.  Capital  Stock  Sold  on  the  Installment  Plan.  When  all  the 
capital  is  not  needed  at  the  time  the  corporation  is  formed,  it  is  customary  to 
allow  the  subscribers  to  pay  for  the  stock  subscribed,  in  installments.  This  plan 
is  especially  applicable  to  corporations  organized  for  the  purpose  of  manufacturing 
a  product  which  will  require  the  construction  of  a  new  factory.  Much  time  will 
elapse  between  the  organization  of  the  corpor  ition  and  the  completion  of  the  fac- 
tory, and  the  installments  can  be  made  payable  so  as  to  be  available  as  needed. 
The  deferred  payment  plan  will  permit  many  to  subscribe  for  the  stock  who  other- 
wise would  be  prohibited  from  doing  so  because  they  might  not  have  sufficient 
cash  to  pay  for  one  or  more  shares. 

If  the  Central  Tire  Company,  a  corporation  organized  for  the  purpose  of 
manufacturing  automobile  tires,  with  a  capital  stock  of  $250,000.00,  par  value 
$100.00  per  share,  sells  $200,000.00  of  its  stock  for  cash  and  $20,000.00  to  sub- 
scribers who  agree  to  pay  one  fourth  of  the  subscription  in  cash  and  the  balance 
in  three  equal  installments,  the  opening  entries  in  journal  form  would  be  as  follows: 


Unissued  Capital  Stock 

Capital  Stock 
To  record  the  authorized  capital  stock. 

Cash 

Unissued  Capital  Stock 
To  record  the  sale  and  issue  of  stock  for  cash. 

Subscribers  to  Capital  Stock 

Subscriptions  to  Capital  Stock 
To  record  subscriptions  to  capital  stock. 

Cash 

Subscribers  to  Capital  Stock 
To  record  cash  received  from  subscribers  in  payment 
for  the  first  installment  of  25  per  cent. 


250,000 


200,000 


20,000 


5,000 


250,000 


200,000 


20,000 


5,000 


00 


When  these  entries  are  posted,  the  authorized  capital  stock  will  be  shown  in  the  Capital  Stock 
account,  the  unissued  stock  in  the  Unissued  Capital  Stock  account,  the  balance  due  from  sub- 
scribers in  the  Subscribers  to  Capital  Stock  account,  the  liability  of  the  corporation  to  issue  stock 
to  subscribers  in  exchange  for  their  promise  to  pay  for  the  stock  will  be  shown  by  the  Subscriptions 
to  Capital  Stock  account,  and  the  cash  received  in  payment  for  the  cash  sale  of  stock  and  for  the 
first  installment  on  stock  subscribed  will  be  recorded. 

When  cash  is  received  from  a  subscriber  for  all  of  his  subscription,  he  is  entitled 
to  a  certificate  of  stock;  when  cash  has  been  received  from  all  the  subscribers  in 
payment  for  their  subscriptions,  certificates  of  stock  will  have  been  issued  for  all 
of  the  capital  stock  sold.  Since  each  subscriber  will  want  a  certificate  at  the  time  he 
pays  his  subscription  in  full,  and  it  is  hardly  possible  that  all  will  pay  at  the  same 
time,  it  is  customary  to  take  the  value  of  the  stock  issued  to  each  subscriber  out 
of  the  Subscriptions  to  Capital  Stock  account  and  transfer  it  to  the  Unissued 
Capital  Stock  account  when  the  certificate  of  stock  is  issued.  This  transfer  is  made 
by  debiting  the  Subscriptions  to  Capital  Stock  account  and  crediting  the  Unissued 
Capital  Stock  account. 

If  John  Smith,  who  has  subscribed  for  ten  shares  of  the  Central  Tire  Company's 
stock,  has  paid  the  last  installment  on  his  subscription  and  a  certificate  of  stock 
has  been  issued,  the  entries  in  journal  form  will  be  as  shown  at  the  top  of  page  270. 


270 


EXERCISES  IN  OPENING  ENTRIES 


250 

00 

250 

1,000 

00 

1,000 

Cash 

Subscribers  to  Capital  Stock 
To  record  cash  received  from  John  Smith  in  payment 
for  the  last  installment  for  stock  subscribed. 

Subscriptions  to  Capital  Stock 

Unissued  Capital  Stock 
Issued  a  certificate  for  ten  shares  of  stock  to  John 
Smith. 

When  these  entries  are  posted,  the  Subscribers  to  Capital  Stock  account  will  show  a  debit 
balance  of  $250.00  less,  the  Unissued  Capital  Stock  account,  a  debit  balance  of  $1,000.00  less,  and 
the  Subscriptions  to  Capital  Stock  account,  a  credit  balance  of  $1,000.00  less.  As  the  subscriptions 
are  paid  in  full  and  the  stock  issued,  the  entries  are  made  in  the  same  form  as  the  entries  above; 
when  all  the  subscriptions  have  been  paid  and  the  stock  issued,  the  Subscribers  to  Capital  Stock 
account  and  the  Subscriptions  to  Capital  Stock  account  will  be  in  balance,  the  Capital  Stock  ac- 
count will  show  the  par  value  of  the  stock  authorized,  and  the  Unissued  Capital  Stock  account  will 
show  the  unissued  stock,  the  difference  between  the  last  two  accounts  being  the  par  value  of  the 
stock  issued  and  outstanding. 

If  a  Balance  Sheet  is  prepared  before  all  the  subscribers  have  paid  their  sub- 
scriptions in  full,  the  capital  accounts  will  be  shown  thereon  as  in  the  illustration 
below,  assuming  that  the  surplus  is  $13,500.00: 

PROPRIETORSHIP: 

Authorized  Capital  Stock 250,000.00 

Less  Unissued  Capital  Stock 47,000.00 


Capital    Stock     Issued    and    Out- 
standing     203,000 .00 

Subscriptions  to  Capital  Stock 17,000 .00 


Surplus 

Total  Proprietorship . 


220,000 
13,500 


233.500 


In  the  above  illustration,  $200,000.00  of  the  authorized  capital  stock  of  $250,000,00  has  been 
sold  for  cash  and  issued.  Of  the  remaining  $50,000.00  of  stock,  $20,000.00  has  been  subscribed, 
and  $5,000.00,  the  first  installment  of  25  per  cent,  has  been  received  from  subscribers  to  apply  on 
their  subscriptions;  in  addition,  $2,250.00  has  been  received  from  some  of  the  subscribers  who 
subscribed  for  thirty  shares  and  paid  in  $750.00,  the  first  installment,  and  stock  amounting  to 
$3,000.00  has  been  issued  to  them.  The  remaining  subscribers  owe  $12,750.00  on  stock  which  has 
not  yet  been  issued;  this  amount,  which  does  not  appear  among  the  proprietorship  accounts,  is 
shown  on  the  asset  side  of  the  Balance  Sheet  as  a  current  asset.  The  unissued  stock  is  $47,000.00, 
of  which  $17,000.00  has  been  subscribed.  When  the  subscribers  pay  the  $12,750.00  due  on  their 
subscriptions,  and  the  total  stock  subscribed  by  them  ($17,000.00)  has  been  issued,  the  Subscribers 
to  Capital  Stock  account  and  the  Subscriptions  to  Capital  Stock  account  will  be  in  balance,  the 
Unissued  Capital  Stock  account  will  show  the  unissued  stock  ($30,000.00),  and  the  Capital  Stock 
account,  the  authorized  capital  stock  of  the  corporation. 


Exercise  No.  92,  Opening  Entry. 

A  charter  was  granted  the  Acme  Manufacturing  Co.  on  January  i,  192.., 
with  an  authorized  capital  stock  of  $500,000.00,  consisting  of  5,000  shares,  par 
value  $100.00  per  share.     Cash  has  been  received  for  all  the  stock  at  its  par  value. 

Make,  in  journal  form,  the  entries  necessary  to  record  the  capital  stock  and 
the  issue  of  stock  to  subscribers. 


Exercise  No.  93,  Opening  Entry. 

H.  O.  Warren  and  C.  W.  Warren  are  partners  in  a  manufacturing  business 
under  the  name  of  Warren  Bros.  They  decide  to  incorporate  the  business, 
and  J.  J.  Bowser,  D.  D.  Marks,  and  A.  L.  Miller  have  signed  the  application  for 
a  charter  with  them.  The  corporation  is  to  have  an  authorized  capital  stock  of 
$500,000.00  of  which  $400,000.00  is  to  be  common  stock,  and  $100,000.00  preferred 


EXERCISES  IN  OPENING  ENTRIES 


271 


stock  (par  value,  $100.00  per  share).  The  corporation  is  to  take  over  the  assets 
and  assume  the  liabihties  of  Warren  Bros,  at  book  value,  and  to  issue  to  H.  O. 
Warren  and  C.  W.  W^arren  each  850  shares  of  common  stock,  and  250  shares  of 
preferred  stock  in  payment  for  their  business.  Bowser  contributes  manufacturing 
supplies  valued  at  $75,000.00,  and  receives  payment  in  common  stock  at  par. 
Marks  subscribes  for  $50,000.00  of  common  stock  and  pays  cash  at  par.  Miller 
subscribes  for  $50,000.00  of  preferred  stock,  for  which  he  pays  cash  at  par. 

The  Balance  Sheet  of  W'arren  Bros,  on  December  5,  192.  .,  the  date  on  which 
the  charter  is  granted,  is  as  follows: 

WARREN  BROS. 
Balance  Sheet,  December  5,  192 


Cash 

Accounts  Receiva 

Inventory 

Office  Equipment 

Delivery  Equipme 

Machinery 

Buildings 

Land 

Assets 

ble 

nt 

$  8,500.00 
41,500.00 
60,000.00 
14,000.00 
18,500.00 

102,500.00 
45,000.00 
30,000.00 

Liabilities 

Accounts  Payable 
Notes  Payable 
Mortgages  Payable 

Total  Liabilities 

Proprietorship 

H.  0.  Warren 
C.  W.  Warren 

Total  Proprietorship 
Total  Liabilities  and  Prop. 

$25,500.00 
45,000.00 
49,500.00 

$120,000.00 

$100,000.00 

$320,000.00 

$200,000.00 

Total  Assets 

$320,000.00 

(i)  Make  the  entries  in  journal  form  to  close  the  books  of  Warren  Bros. 
(2)  Make  the  entries  in  journal  form  to  open  the  books  of  the  corporation. 

Exercise  No.  94,  Opening  Entry. 

Albert  C.  Bacon,  who  has  been  conducting  a  retail  grocery  store,  decides  to 
incorporate  and  operate  under  the  firm  name  of  The  Cash  Grocerv  Company. 
H.  M.  Barnes,  E.  M.  Ward,  C.  A.  Peters,  A.  S.  Weller,  and  A.  E.  Harmon  join 
with  him  in  the  application  for  the  charter.  The  corporation  is  to  have  an  author- 
ized capital  stock  of  $10,000.00,  consisting  of  1,000  shares,  par  value  $10.00. 
Barnes  subscribes  for  100  shares.  Ward  for  75  shares,  Peters  for  25  shares,  Weller 
for  50  shares  and  Harmon  for  100  shares,  payment  to  be  made  when  the  charter 
has  been  granted.  Bacon  is  to  receive  $6,000.00  for  his  interest  in  the  business, 
payable  $1,000.00  cash,  and  the  balance  in  stock  at  par. 

On  January  i,  192.  .,  when  the  charter  is  granted,  the  Balance  Sheet  made 
from  Bacon's  ledger  appears  as  follows: 

A.  C.  BACON 
Balance  Sheet,  January  1,  192 


Assets 
Cash 

Notes  Receivable 
Accounts  Receivable 
Mdse.  Inventory 
Furniture  and  Fixtures 


Total  Assets 


^i  ,735 -50 

215.46 

1,946.58 

6,135-50 

690.00 


Liabilities 

Notes  Payable  $2,245.55 

Accounts  Payable  2,977.49 

Total  Liabilities  $5,223.04 
Proprietorship 

A.  C.  Bacon  5,500.00 


$10,723.04    j     Total  Liabilities  and  Prop. 


$10,723 .04 


(i)  Make  the  entries  in  journal  form  to  close  the  books  of  A.  C.  Bacon. 

(2)  Make  the  entries  in  journal  form  to  open  the  books  of  the  corporation. 


272  QUESTIONS 

QUESTIONS 

1.  Why  should  the  authorized  capital  stock  be  shown  on  the  Balance  Sheet? 

2.  How  should  this  be  recorded  when  only  a  part  of  the  authorized  capital   has 

been  sold  and  issued? 

3.  What  account  shows  the  investment  in  a  corporation  before  the  subscriptions 

by  subscribers  have  been  paid  in  full,  and  the  stock  issued  to  them? 

4.  If  the  authorized  capital  stock  is  $100,000.00,  and  $90,000.00  has  been  sub- 

scribed, of  which  $45,000.00  has  been  paid  and  stock  issued,  and  $45,000.00 
only  half  paid  for,  what  accounts  in  the  ledger  will  show  these  facts? 

5.  If  the  stockholders  vote  to  reduce,  the  capital  stock  of  the  corporation,  how 

will  this  reduction  be  effected? 

6.  When  more  than  the  book  value  is  paid  for  assets  purchased  by  a  corpora- 

tion at  the  beginning,  what  account  shows  the  difference  between  the 
purchase  price  and  the  book  value  of  these  assets? 

7.  If  the  corporation  offers  one  share  of  common  stock,  par  value  $100.00,  free 

with  each  share  of  preferred  stock,  par  value  $100.00,  purchased  and  paid 
for  in  cash,  how  will  the  sale  of  100  shares  of  preferred  stock  be  recorded, 
assuming  that  cash  is  received  for  the  stock  at  the  time  it  is  sold? 

8.  Why  would  a  corporation  give  common  stock  free  with  preferred  stock  pur- 

chased ? 

9.  If  a  corporation   (authorized  capital  stock  issued,   $200,000.00)   secures  an 

amendment  to  its  charter  permitting  it  to  double  the  capital  stock,  and  it 
is  decided  to  sell  three-fourths  of  this  new  issue,  what  entry  will  be  required 
to  record  this  stock,  provided  it  is  sold  one-half  cash,  balance  payable 
within  90  days?  If  the  new  issue  were  equally  divided  between  preferred 
and  common  stock,  what  effect  would  this  have  on  the  entry? 
10.  In  what  respect  does  the  opening  entry  for  a  corporation  resemble  the  opening 
entry  for  a  business  operated  by  an  individual  or  by  partners? 


Chapter  XXIX 


CONSTRUCTION  AND  INTERPRETATION  OF  SPECIFIC 

ACCOUNTS 

The  Purpose  of  this  Chapter  is  to  explain  accounts  with  selling  cost,  branch 
store,  agents,  controlling  accounts,  and  notes  receivable  discounted.  Some  of  these 
accounts  have  been  discussed  in  previous  chapters,  but  the  information  is  repeated 
briefly  in  this  chapter  for  the  benefit  of  the  student  who  is  working  this  division  in- 
dependently of  those  which  precede  it. 

§  288.  Selling  Expense  refers  to  the  cost  of  selling  the  merchandise  or 
service  in  which  the  business  deals.  As  explained  in  Chapter  XVI,  all  the  cost  of 
selling  may  be  recorded  in  one  account  or  the  transactions  affecting  selling  cost 
may  be  analyzed  at  the  time  they  occur  and  recorded  in  separate  accounts.  Selling 
cost  may  be  divided  into  (a)  advertising,  (b)  salaries  in  the  selling  department, 
(c)  salaries  and  expenses  of  traveling  salesmen,  (d)  warehouse  expense,  and  (e) 
delivery  expense. 

If  desired,  selling  expenses  may  be  classified  so  as  to  apply  to  departments,  each  of  which  is 
in  charge  of  and  indi\idually  responsible  for  the  operations  of  that  particular  department;  this 
plan  is  desirable  when  the  operations  of  the  business  are  extensive  and  the  management  must  depend 
on  reports  in  order  to  exercise  the  proper  control. 

The  classification  of  the  accounts  discussed  in  this  chapter  applies  more  to  the  nature  of  the 
expenses  than  to  the  departments,  the  purpose  being  to  show  the  student  that  selling  expenses  are 
of  different  natures  and  that  the  accounts  set  up  to  record  these  should  be  grouped  so  as  to  show  the 
total  cost  of  each.  The  management  of  a  business  should  know  the  selling  cost  applicable  to  adver- 
tising, salaries  of  clerks  in  the  store,  expenses  of  salesmen  on  the  road,  cost  of  maintaining  the  ship- 
ping room  or  warehouse,  cost  of  delivering  goods  sold,  etc. 

§  289.  Advertising  Cost  refers  to  the  expense  incurred  in  connection  with 
advertising  in  newspapers  and  magazines,  circulars,  catalogs,  novelties,  etc.  Two 
accounts  should  be  kept  to  show  these  expenses:  one  with  Advertising  Expense 
and  the  other  with  Advertising  Material. 

ADVERTISING  EXPENSE  ACCOUNT 

§  290.  The  Purpose  of  this  Account  is  to  show  the  cost  of  advertising. 
This  includes  (a)  salaries,  (b)  newspaper  and  magazine  space,  and  (c)  catalogs, 
circulars,  and  advertising  nov^elties  distributed;  the  entry  for  the  last  cost  is 
made  at  the  close  of  the  fiscal  period  after  the  value  of  the  material  on  hand  has 
been  ascertained  by  an  inventory. 

Debit  the  Advertising  Expense  Account:  Credit  the  Advertising  Expense  Account: 
^  I.     For     the     cost     of     advertising  \  3.     For  any  adjustment  which   re- 
service,  duces  the  advertising  cost  as 
II  2.     At  the  close  of  the  fiscal  period,  shown   by   the   debit   side   of 
for  the  cost  of  advertising  ma-  this   account, 
terial  used  during  the  period. 

^  4.  The  Balance  of  the  Advertising  Expense  Account  shows  the  net  cost  of 
advertising;  it  is  shown  on  the  Statement  of  Profit  and  Loss  as  one  of  the  selling 
expenses. 

*  273 


274  SELLING  EXPENSE  ACCOUNTS 

ADVERTISING  MATERIAL  ACCOUNT 

§  291.  The  Purpose  of  this  Account  is  to  show  the  cost  of  material  pur- 
chased for  use  in  advertising;  this  includes  catalogs,  circulars,  stationery  for  the 
advertising  department,  advertising  novelties,  etc.  The  nature  of  the  account  is 
the  same  as  that  of  Office  Supplies. 

Debit  the  Advertising  Material  Account:  Credit  the  Advertising  Material  Account: 

T[  I.     For     the     cost     of     advertising  \  2.     At  the  close  of  the  fiscal  period, 

material  purchased.  for    the    cost    of    advertising 

material    used. 

1[  3.  The  Balance  oj  the  Advertising  Material  Account  during  the  fiscal  period 
shows  the  net  cost  of  advertising  material  purchased;  the  balance  of  this  account 
after  the  value  of  the  material  used  has  been  entered  at  the  close  of  the  fiscal 
period,  shows  the  value  of  advertising  material  on  hand.  This  latter  balance  is 
shown  on  the  Balance  Sheet  (Illustration  No.  130)  as  a  deferred  charge. 

SALARIES  IN  SELLING  DEPARTMENT  ACCOUNT 

§  292.  The  Purpose  of  this  Account  is  to  show  the  amount  paid  to  em- 
ployees (except  traveling  salesmen)  in  the  selling  department.  In  a  mercantile 
business  this  includes  the  salaries  of  clerks  who  are  engaged  in  selling  merchandise 
and  of  those  who  supervise  the  work  of  these  clerks. 

Debit  the  Salaries  in  Selling  Credit  the  Salaries  in  Selling 
Department  Account:  Department  Account: 
^  I.     For    the    salaries    of    all    sales  ^  2.     For  any  adjustments  which  re- 
clerks    except    those    on    the  duce   the   cost   of   salaries   in 
road.  the    selling   department. 

^  3.  The  Balance  of  the  Salaries  in  Selling  Department  Account  shows  the 
amount  paid  clerks  and  salesmen ;  it  is  shown  on  the  Statement  of  Profit  and  Loss 
(Illustration  No.  131)  as  one  of  the  selling  costs. 

TILWELING  EXPENSE  ACCOUNT 

§  293.  The  Purpose  of  this  Account  is  to  show  the  cost  of  selling  mer- 
chandise through  traveling  salesmen;  this  includes  salaries,  transportation,  hotel 
accommodation,  and  other  authorized  expenditures.  Salaries  include  not  only  the 
amount  assigned  each  salesman  as  his  drawing  account,  but  also  commission  paid 
to  him  in  excess  of  his  drawing  account. 

Debit  the  Traveling  Expense  Account:  Credit  the  Traveling  Expense  Account: 
\  I.     For    the    salaries    of    traveling  ^  3.     For  any  adjustments  which  re- 
salesmen,  duce  the  cost  shown  by   the 
*\  2.     For  all  amounts  paid  as  expenses  debit  side, 
for  salesmen  on  the  road,  as 
reported  by  each  salesman. 

Tl  4.  The  Balance  of  the  Traveling  Expense  Account  shows  the  cost  of  selling 
merchandise  through  traveling  salesmen;  it  is  shown  as  one  of  the  selling  costs 
on  the  Statement  of  Profit  and  Loss  (Illustration  No.  131.) 

NOTE.  An  account  is  kept  with  each  traveling  salesman;  this  is  debited  with  the  cash 
advanced  to  him  and  credited  with  his  expenses  as  reported  weekly  or  monthly. 


SELLING  EXPENSE  ACCOUNTS  275 

§  294.  Warehouse  Expense  refers  to  the  cost  of  preparing  merchandise 
for  dehvery  after  it  is  sold,  and  includes  wages  of  employees  in  the  warehouse  or 
shipping  room  and  material  used  in  packing  the  merchandise.  Warehouse  expense 
is  one  of  the  operating  costs  resulting  from  the  sale  of  merchandise  and  is  shown 
on  the  Statement  of  Profit  and  Loss,  either  as  a  selling  expense  or  as  a  separate 
expense  item.  When  a  record  of  the  sales  by  departments  is  maintained,  the  total 
warehouse  expense  is  distributed  to  the  departments  in  the  same  proportion  as  the 
sales  for  the  department  are  to  the  total  sales. 

Since  material  is  needed  in  connection  with  the  shipment  of  merchandise  sold,  two  accounts 
are  necessary  to  show  the  cost  of  maintaining  the  warehouse,  one  with  warehouse  material  and 
the  other  with  warehouse  expense;  where  a  separate  warehouse  is  not  maintained  for  receiving 
and  shipping,  the  title  "Shipping  Room"  may  be  substituted  for  "Warehouse." 

If  it  is  desired  to  show  all  costs  in  connection  with  the  purchase  of  merchandise  separate 
from  the  cost  of  selling  or  costs  which  result  from  selling,  and  the  warehouse  is  used  for  receiving 
goods  purchased  and  packing  goods  sold,  it  will  be  necessary  to  transfer  a  part  of  the  warehouse 
expense  to  the  proper  account  in  the  "cost  of  purchases"  group  at  the  end  of  each  month  or  fiscal 
period.  The  amount  transferred  will  depend  on  the  volume  of  the  purchases  and  sales  or  the  aver- 
age cost  incident  to  each,  based  on  the  nature  of  the  work  required  in  receiving  and  shipping  goods. 

WAREHOUSE  MATERIAL  ACCOUNT 
§  295.  The  Purpose  of  this  Account  is  to  show  the  cost  of  cases,  wrapping 
paper,  twine,  nails,  and  other  supplies  purchased  for  use  in  packing  merchandise 
after  it  has  been  sold.  The  nature  of  this  account  is  the  same  as  that  of  Adver- 
tising Material,  and  the  debits  and  credits  are  the  same  except  that  they  are  ap- 
plicable to  material  purchased  for  use  in  the  warehouse.  The  balance,  after  the 
adjusting  entry  for  the  value  of  the  material  used  during  the  period  has  been  made 
at  the  close  of  the  fiscal  period,  will  show  the  value  of  the  material  on  hand;  this 
is  shown  as  a  deferred  charge  on  the  Balance  Sheet  (Illustration  No.  130). 

WAREHOUSE  EXPENSE  ACCOUNT 
§  296.  The  Purpose  of  this  Account  is  to  show  the  cost  of  maintaining 
the  warehouse  or  shipping  room;  this  includes  rent,  wages  of  employees  and  cost 
of  material  used  during  the  period ;  the  entry  for  the  latter  cost  is  made  at  the  close 
of  the  fiscal  period  after  the  value  of  the  material  has  been  ascertained  through 
an  inventory. 

Debit  the  Warehouse  Expense  Account:  Credit  the  Warehouse  Expense  Account: 

\  I.     For  the  wages  of  employees  and  ^  3.     For  any  adjustments  which  re- 

other  expenses   in   connection  duce   the   cost   shown   by   the 

with    maintaining    the    ware-  debit    side, 

house  at  the  time  the  expense 
is  incurred. 
\  2.  For  the  value  of  warehouse  ma- 
terial consumed  during  the 
period,  at  the  close  of  the  fis- 
cal period. 

^  4.  The  Balance  of  the  Warehouse  Expense  Account  shows  the  cost  of  main- 
taining the  warehouse;  it  is  shown  on  the  Statement  of  Profit  and  Loss  either 
in  the  selling  group  (Illustration  No.  131)  or  as  a  separate  item. 

§  297.  Delivery  Expense  is  the  cost  of  delivering  merchandise  after  it  has 
been  sold,  to  both  local  and  out-of-town  customers.  Delivery  cost  includes  the 
wages  of  chauffeurs  and  drivers,  gasoline  and  oil  for  automobiles,  feed  for  horses, 
the  cost  of  maintaining  the  delivery  equipment  (such  as  taxes,  license,  repairs, 
depreciation,  and  insurance),  prepaid  freight,  express,  or  parcel  post  where  the 
contract  is  to  deliver  the  goods,  and  any  other  expenses  in  connection  with  making 
delivery  after  sale.  The  cost  of  delivery  is  usually  recorded  in  two  accounts:  one 
with  Delivery  Expense  and  the  other  with  Freight  Out. 


276  SELLING  EXPENSE  ACCOUNTS 

DELIVERY  EXPENSE  ACCOUNT 
§  298.     The  Purpose  of  this  Account  is  to  show  the  cost  of  delivering 
merchandise  to  local  customers  and  to  the  freight  depot  for  out-of-town  customers, 
whether  the  business  owns  its  own  delivery  equipment  or  has  its  merchandise 
delivered  by  contract. 
Debit    the    Delivery    Expense   Account:  Credit   the  Delivery   Expense  Account: 

\  I.     For  amounts  paid   for  delivery  ^  3.     For  adjustments  which  decrease 

of  merchandise  sold.  the    delivery    cost    as    shown 

\  2.     For  the  cost  of  maintaining  a  by    the    debit    side    of    this 

delivery     department,     which  account, 

includes   (a)   wages,   gasoline, 
and    feed,    (b)    repairs,   insur- 
ance,- taxes,  and  depreciation 
on  delivery  equipment. 
^  4.     The  Balance  of  the  Delivery  Expense  Account  shows  the  cost  of  delivering 
merchandise;  it  is  shown  as  one  of  the  selling  expenses  on  the  Statement  of  Profit 
and  Loss  (Illustration  No.  131). 

"Free  on  board"  (abbreviated  "f.  o.  b.")  is  a  term  frequently  used  in  connection  with  the 
sale  and  shipment  of  merchandise.  If  the  seller  is  to  deliver  the  merchandise  to  the  buyer,  he  in- 
dicates this  by  stating  in  his  quotation  of  price  "f.  o.  b.  your  freight  station;"  if  the  seller  is  not  to 
deliver  the  merchandise  to  the  buyer,  this  is  indicated  by  stating  in  the  quotation  "f.  o.  b.  our  freight 
station."  The  meaning  of  the  first  expression  is  that  the  seller  prepays  the  freight  to  the  freight 
station  at  which  the  buyer  will  receive  it,  or  that  he  allows  the  buyer  to  pay  the  freight  and  deduct 
the  amount  from  the  invoice.  The  meaning  of  the  second  expression  is  that  the  seller  agrees  to 
deliver  the  merchandise  to  the  freight  station  of  the  railroad  which  is  to  transport  it,  and  the  buyer 
will  pay  the  freight  when  the  transportation  company  delivers  it,  or  that  he  (the  seller)  will  prepay 
the  freight  and  add  the  amount  to  the  invoice  rendered  the  buyer. 

FREIGHT  OUT  ACCOUNT 

§  299.  The  Purpose  of  this  Account  is  to  show  the  delivery  cost  of  mer- 
chandise sold  f.  o.  b.  the  freight  station  of  a  customer;  this  includes  the  freight 
paid  by  the  seller  or  the  freight  paid  by  the  customer  and  deducted  by  him  from 
the  amount  of  the  sales  invoice.  The  term  "freight"  includes  transportation  cost 
whether  the  merchandise  is  shipped  by  railroad,  steamship,  express,  or  parcel 
post.  The  term  "out"  or  "in"  is  written  after  "freight"  to  indicate  whether  the 
charge  is  applicable  to  merchandise  sold  or  merchandise  bought.  If  it  is  applicable 
to  merchandise  bought  (Freight  In),  the  balance  of  the  account  is  a  purchase 
cost;  if  it  is  applicable  to  merchandise  sold  (Freight  Out),  it  is  a  selling  cost. 
Debit    the    Freight    Out    Account:  Credit    the    Freight    Out    Account: 

^  I.  For  the  transportation  cost  of  1[  2.  For  any  adjustments  which  re- 
merchandise  sold  f.  o.  b.  the  duce  the  delivery  cost  result- 
customer's  freight  station,  and  ing  from  paying  freight  on 
transportation  cost  of  mer-  merchandise  sold  as  shown  by 
chandise  returned  by  a  cus-  the  debit  side, 
tomer. 

H  3.  The  Balance  of  the  Freight  Out  Account  shows  the  transportation  cost  of 
merchandise  sold  f.  o,  b.  the  customer's  freight  station.  It  is  shown  as  one  of  the 
selling  expenses  on  the  Statement  of  Profit  and  Loss  (Illustration  No.  131). 

NOTE.  If  desired,  the  Freight  Out  account  may  be  credited  with  the  transportation  cost 
on  the  merchandise  sold  f.  o.  b.  the  customer's  freight  station  at  the  time  the  sale  is  recorded  and 
debited  with  the  transportation  cost  when  it  is  paid.  This  plan  is  desirable  when  a  delivered  price 
is  made  on  all  or  the  greater  part  of  the  merchandise  sold,  because  the  selling  price  includes  trans- 
portation and,  if  this  is  not  separated  from  the  sales  price,  the  balance  of  the  Sales  account  will  not 
show  the  true  sales.  When  this  plan  is  followed,  the  Freight  Out  account  will  be  in  balance 
after  all  freight  bills  have  been  paid;  if  not  in  balance,  it  will  show  the  amount  of  transportation 
which  is  unpaid. 


ACCOUNTING  FOR  AGENCIES  277 

§  300.  Agencies.  An  agent  is  one  who  acts  in  a  legal  capacity  for  another, 
either  in  the  performance  of  a  contract  or  the  sale  of  merchandise.  With  reference 
to  the  sale  of  merchandise,  there  are  two  classes  of  agents:  one  who  carries  in  stock 
at  all  times  merchandise  belonging  to  a  principal,  and  the  other,  one  who  carries 
in  stock  merchandise  belonging  to  various  principals;  the  latter  class  includes  the 
consignee  in  a  commission  business  where  merchandise  is  received  from  various 
owners  and  sold  on  their  account  and  risk.  When  the  agent  represents  a  principal 
from  year  to  year  and  carries  his  goods  in  stock  for  sale  at  a  price  fixed  by  the 
principal  and  on  a  commission  basis,  it  is  necessary  for  the  agent  to  keep  an  ac- 
count with  each  principal,  also  to  report  to  the  principal  according  to  the  terms 
of  the  agreement  and  remit  for  the  merchandise  sold.  The  commission  merchant 
usually  sells  all  the  goods  before  sending  an  account  sales;  the  agent  makes  period- 
ical reports  of  merchandise  sold  without  waiting  for  all  the  goods  to  be  sold. 

The  rule  of  agency  does  not  apply  where  the  business  has  the  exclusive  sale  of  merchandise 
of  a  certain  variety  but  pays  for  it.  Thus,  if  a  druggist  has  the  exclusive  sale  of  a  certain  kind  of 
medicine,  but  buys  and  pays  for  this  medicine  the  same  as  other  merchandise,  he  is  not  an  agent 
and  his  record  of  the  transactions  with  the  manufacturer  of  the  medicine  will  be  the  same  as  that 
with  any  other  trade  creditor. 

AGENT'S  ACCOUNT  WITH  PRINCIPAL 

§  301.  The  Purpose  of  this  Account  is  to  show  a  record  of  all  the  trans- 
actions which  the  agent  has  in  connection  with  merchandise  belonging  to  the 
principal.  The  account  is  of  the  same  nature  as  the  Consignment  In  account 
except  that  the  agent  makes  reports  periodically  according  to  agreement  and 
continues  to  sell  the  same  merchandise  for  the  same  principal  from  year  to  year. 

The  Agent  Debits  the  Principal:  The  Agent  Credits  the  Principal: 

^  I.     For  the  transportation  cost  paid  H  4.     For    the   value    of   merchandise 

by    the   agent.  received    from    the    principal, 

T[  2.     For  cash  (or  other  assets)  given  as  per  invoice  rendered;    the 

the  principal  in  payment  for  Purchases  account  is  debited, 

the   amount   due   him   for  his 
merchandise  sold. 

^  3.  For  the  agent's  commission  on 
sales  of  merchandise  belong- 
ing  to   the   principal. 

%  5.  The  Balance  of  the  Agent's  Account  with  the  Principal  shows  the  amount 
due  the  principal  from  the  agent;  it  is  not  all  a  liability  of  the  agent  because  he 
is  required  to  pay  only  for  the  merchandise  sold.  At  the  close  of  a  fiscal  period, 
the  value  of  the  merchandise  in  stock  belonging  to  the  principal  should  be  removed 
from  the  ledger  by  an  entry  in  which  this  account  is  debited  and  Purchases  credited; 
after  the  ledger  is  closed,  the  amount  is  recorded  in  the  ledger  again  by  an  entry 
in  which  Purchases  is  debited  and  this  account  credited. 

NOTE.  It  will  be  advisable  for  the  agent  to  maintain  a  going  inventory  of  the  merchandise 
which  he  has  in  stock  belonging  to  the  principal.  A  card  ruled  for  purchases  and  sales  should  be  pro- 
vided for  each  class  of  merchandise;  the  information  in  regard  to  purchases  is  obtained  from  the 
invoices  rendered  by  the  principal,  and  that  in  regard  to  sales,  from  the  sales  invoices  rendered  by 
the  agent  to  his  customers.  When  a  report  is  to  be  prepared  for  the  principal,  a  physical  inventory 
is  taken  and  the  record  on  the  card  compared  with  this. 

PRINCIPAL'S  ACCOUNT  WITH  AGENT 

§  302.  The  Purpose  of  this  Account  is  to  show  the  transactions  which' 
the  principal  has  with  his  agent,  in  order  that  he  may  verify  the  reports  of  the 


278  BRANCH  STORE  ACCOUNTING 

agent.  The  debits  and  credits  below  are  applicable  when  the  agent  carries  in 
stock  merchandise  of  the  principal  and  reports  the  sales  of  this  merchandise  at 
specified  times  as  per  agreement. 

The  Principal  Debits  the  Agent:  The  Principal  Credits  the  Agent: 

^  I.     For    the   value   of   merchandise  ^  2.     For   cash    (or  other   assets)    re- 

shipped   to  the  agent  as  per  ceived  from  the  agent  on  ac- 

sales    invoice    rendered;     the  count  of  sales,  for  transporta- 

Sales    account    is    credited.  tion  and  other  costs  paid  by 

him,   and   for   his  commission 

on  sales. 

^  3.  The  Balance  of  the  Principal' s  Account  with  the  Agent  shows  the  amount 
due  from  the  agent  for  merchandise  in  his  possession;  it  is  not  all  an  asset  because 
the  agent  is  required  to  pay  only  for  the  merchandise  he  has  sold. 

It  is  necessary  for  the  principal  to  adjust  the  account  with  the  agent  at  the  close  of  the  fiscal 
period  because  the  merchandise  in  the  hands  of  the  agent  has  not  been  sold  to  the  agent.  The 
method  of  adjustment  is  to  debit  Sales  and  credit  the  agent  for  the  balance  of  the  account.  This 
takes  out  of  the  Sales  account  the  value  of  the  merchandise  credited  to  it,  which  has  not  been  sold, 
and  removes  the  agent's  account  from  the  ledger.  The  value  of  the  merchandise  in  the  hands  of 
the  agent  is  shown  at  cost  on  the  Balance  Sheet  of  the  principal;  the  value  of  this  merchandise  is 
not  shown  on  the  Balance  Sheet  of  the  agent  because  he  has  not  purchased  it. 

§  303.  The  Account  which  the  agent  keeps  with  the  principal  and  the 
account  which  the  principal  keeps  with  the  agent  should  agree  at  the  time  the 
periodical  report  is  submitted  by  the  agent.  The  adjustments  necessary  for  the 
principal  or  agent  to  make  at  the  close  of  a  fiscal  period  do  not  affect  the  account, 
hence  either  can  make  these  adjustments  without  notifying  the  other. 

§  304.  Branch  Store  Accounting.  A  branch  store,  as  the  name  indicates, 
is  a  store  operated  at  a  place  different  from  the  main  store,  either  in  the  same  city 
or  in  another  city.  Branches  are  maintained  by  wholesale  establishments  for  the 
retail  distribution  of  certain  classes  of  merchandise  and  to  enable  the  main  store 
to  keep  In  closer  touch  with  the  trade  in  the  community  which  it  serves.  There 
are  many  other  reasons  for  the  establishment  of  branch  stores,  but  these  two  will 
serve  the  purpose  in  the  present  discussion. 

When  a  branch  store  Is  established,  it  is  necessary  for  the  general  office  (usually 
located  at  the  main  store)  to  keep  in  touch  with  the  activities  of  the  branch  through 
its  records.     There  are  two  methods  In  general  use: 

1,  No  accounting  records  are  kept  by  the  branch  store  except  memoranda 
of  the  various  transactions  completed.  The  books  of  original  entry  and  the  ledger 
for  recording  the  branch  store  transactions  are  maintained  at  the  general 
office.  When  this  plan  Is  followed,  all  business  forms  and  vouchers  which  represent 
transactions  completed  by  the  branch  store  are  forwarded  to  the  main  store  for 
recording.  As  stated  at  the  beginning,  the  branch  store  retains  memoranda 
of   the   transactions   for   auditing   purposes. 

2.  The'branch  store  maintains  a  complete  accounting  system,  including  books 
of  original  entry  and  a  ledger  or  ledgers.  When  this  plan  Is  followed,  the  branch 
store  records  all  transactions  which  it  completes  and  maintains  in  the  general 
ledger  an  account  with  the  general  office  or  main  store,  which  takes  the  place 
of  the  proprietorship  accounts.  On  the  ledger  of  the  main  store  or  general 
office,  there  will  be  a  similar  controlling  account  for  each  branch.  Monthly  reports 
are  submitted  by  the  branch  so  that  the  controlling  account  on  the  main  store 
ledger  may  be  audited.  The  title  of  the  controlling  account  for  the  branch  store 
in  the  general  ledger  of  the  main  store  may  be  "Branch  Store,"  or  any  name  applied 


BRANCH  STORE  ACCOUNTS  279 

to  the  branch  store,  such  as  "Store  No.  10,"  "Southside  Branch,"  "Milwaukee 
Branch,"  "Springfield  Branch,"  or  the  name  under  which  the  branch  store  is 
operated  if  the  name  is  different  from  that  of  the  main  store. 

The  purpose  of  the  discussion  here  is  not  to  give  an  elaborate  explanation  of  branch  store 
accounting,  but  to  show  the  student  some  of  the  methods  used.  The  subject  of  accounting  in  its 
various  phases  can  not  be  mastered  in  an  elementary  course,  and  the  student  should  understand 
that  there  is  much  more  to  learn  about  the  subject  than  is  given  in  an  elementary  accounting  text. 

BRANCH  STORE  ACCOUNT 

§  305.  The  Purpose  of  this  Account  is  to  show  a  record  of  all  transactions 
with  the  branch  store  which  it  controls.  This  account  is  kept  under  the  second 
plan  discussed  in  §  304. 

Debit   the   Branch    Store   Account:  Credit  the  Branch   Store  Account: 

1[  I.     For  the  net  assets  on  hand  at  the  ^6.     For     cash     received     from     the 

branch    store    at    the    begin-  branch  store  for  the  sales  made 

ning    of    the    fiscal    period.  by  it. 

1[  2.     For    merchandise    sold    to    the  ^7.     For  the  net. assets  on  hand  at  the 

branch    by    the    main    store.  branch   store   at   the   close   of 

^  3.     For  merchandise  purchased   for  of  the   fiscal   period. 

the  branch  by  the  main  store. 
\  4.     For  salaries  and  wages  paid  to 

employees  of  the  branch  store 

by   the   main   store. 
^  5.     For  other  expenses  paid  for  the 

branch     by    the    main    store. 

^  8.  *The  Balance  of  the  Branch  Store  Account,  after  the  adjustments  have 
been  made  for  the  inventories  at  the  close  of  the  fiscal  period,  will  show  the  profit 
or  loss  resulting  from  the  operations  of  the  branch  store;  if  the  debit  side  is  the 
larger,  a  loss,  or  if  the  credit  side  is  the  larger,  a  profit.  The  balance  will  be  shown 
in  the  trading  section  on  the  Statement  of  Profit  and  Loss  (Illustration  No.  131) 
of  the  main  store.  The  Statement  of  Profit  and  Loss  submitted  by  the  manage- 
ment of  the  branch  store  will  support  the  entry  on  the  Statement  of  Profit  and 
Loss  of  the  main  store. 

BRANCH  STORE  INVENTORY  ACCOUNT 

§  306.  The  Purpose  of  this  Account  is  to  show  the  value  of  the  assets  on 
hand  at  the  branch  store  at  the  close  of  the  fiscal  period;  these  assets  include  all 
property  on  the  books  of  the  branch  store.  If  desired,  the  current  assets,  fixed 
assets,  and  deferred  charges  may  be  recorded  in  separate  accounts.  The  manager 
of  the  branch  store  will  prepare  a  Balance  Sheet  from  his  books  and  this  will  be 
used  as  a  schedule  to  support  the  item  "Branch  Store  Inventory"  on  the  Balance 
Sheet  (Illustration  No.  130)  of  the  main  store.  After  the  ledger  is  closed,  the 
inventory  or  inventories  of  the  branch  store  assets  may  be  transferred  to  the  Branch 
Store  account  (Illustration  No.  134),  or  this  transfer  may  be  made  at  the  close 
of  the  fiscal  period. 

*If  desired,  If  7  may  be  omitted  and  H  6  changed  to  read  "For  all  sales  made  by  the  branch 
store."  If  these  changes  are  made  and  the  Branch  Store  account  is  debited  with  the  net  profit  or 
credited  with  the  net  loss  as  shown  by  the  Statement  of  Profit  and  Loss  prepared  by  the  manager 
of  the  branch  store,  the  balance  of  this  account  will  show  the  net  value  of  the  assets  belonging  to 
the  branch  store  at  the  close  of  the  fiscal  period  and  will  be  shown  as  a  current  asset  on  the  Balance 
Sheet  of  the  main  store  prepared  at  that  time. 


28o  CONTROLLING  ACCOUNTS 

§  307.  A  Controlling  Account  is  one  which  represents  in  total  the  facts 
shown  in  detail  in  a  number  of  other  accounts  (§  i6o).  Controlling  accounts  are 
used  more  frequently  with  accounts  receivable  and  accounts  payable  because 
usually  a  great  number  of  accounts  are  required  to  record  the  transactions  with 
customers  and  creditors.  The  controlling  account  is  kept  in  the  general  ledger  and 
the  accounts  which  it  controls,  in  a  subsidiary  ledger.  The  title  of  the  controlling 
account  in  the  general  ledger  for  accounts  with  customers  is  Accounts  Receivable, 
and  for  accounts  with  creditors,  Accounts  Payable. 

§  308.  The  Accounts  Receivable  Account  in  the  general  ledger  contains 
in  total  the  same  debits  and  credits  which  appear  in  detail  in  the  various  accounts 
with  customers  in  a  subsidiary  ledger.  Each  customer  is  debited  in  the  subsidiary 
ledger  with  the  amount  of  his  purchase  as  recorded  in  the  sales  journal,  and  the 
Accounts  Receivable  account  is  debited  at  the  end  of  the  month  with  the  total  of 
this  journal.  Each  customer  is  credited  in  the  subsidiary  ledger  with  cash  received 
from  him  as  recorded  on  the  receipts  side  of  the  cash  book,  and  the  total  of  the 
cash  received  from  customers  is  posted  at  the  end  of  the  month  to  the  credit  of 
the  Accounts  Receivable  account  in  the  general  ledger;  credits  to  customers  which 
include  cash  and  discount  should  be  entered  in  special  columns  in  the  cash  book. 
Each  customer  is  credited,  in  a  special  column  in  the  general  journal,  with  notes, 
drafts,  and  assets  other  than  cash  accepted  to  apply  on  account,  and  the 
total  of  such  credits  is  posted  at  the  end  of  the  month  to  the  credit  of  the  Accounts 
Receivable  account  in  the  general  ledger.  Each  customer  is  credited  in  his  ac- 
count in  a  subsidiary  ledger  with  the  amount  of  each  allowance  for  damaged 
goods  or  goods  returned  as  recorded  in  the  sales  returns  journal,  and  the  total  of 
this  journal  is  posted  at  the  end  of  the  month  to  the  credit  of  the  Accounts  Re- 
ceivable account  in  the  general  ledger. 

The  balance  of  the  controlling  account  with  Accounts  Receivable  in  the  gen- 
eral ledger  should  be  the  same  as  the  total  of  all  the  balances  due  from  customers 
in  a  subsidiary  ledger.  After  the  Trial  Balance  from  the  general  ledger  has  been 
proved,  the  balances  in  the  subsidiary  ledger  should  be  listed  and  the  total  proved 
with  the  balance  of  the  Accounts  Receivable  account. 

§  309.  The  Accounts  Payable  Account  in  the  general  ledger  contains  in 
total  the  same  debits  and  credits  which  appear  in  detail  in  the  various  accounts 
with  creditors  in  a  subsidiary  ledger.  Each  creditor  is  credited  in  the  subsidiary 
ledger  with  the  amount  of  the  purchase  from  him  as  recorded  in  the  purchases 
journal,  and  the  Accounts  Payable  account  is  credited  at  the  end  of  the  month  with 
the  total  of  this  journal.  Each  creditor  is  debited  in  the  subsidiary  ledger  with 
cash  paid  to  him  as  recorded  on  the  payments  side  of  the  cash  book,  and  the  total 
of  the  cash  paid  creditors  is  posted  at  the  end  of  the  month  to  the  debit  of  the 
Accounts  Payable  account  in  the  general  ledger;  debits  to  creditors  which  include 
cash  and  discount  should  be  entered  in  special  columns  in  the  cash  book.  Each 
creditor  is  debited,  in  a  special  column  in  the  general  journal,  with  notes,  drafts, 
and  assets  other  than  cash  given  him  to  apply  on  account,  and  the  total 
of  such  credits  is  posted  at  the  end  of  the  month  to  the  debit  of  the  Accounts 
Payable  account  in  the  general  ledger.  Each  creditor  is  debited  in  his  account 
in  a  subsidiary  ledger  with  the  amount  of  each  allowance  for  damaged  goods  or 
goods  returned  to  him  as  recorded  in  the  purchases  returns  journal,  and  the  total 
of  this  journal  is  posted  at  the  end  of  the  month  to  the  debit  of  the  Accounts 
Payable  account  in  the  general  ledger. 

The  balance  of  the  controlling  account  with  Accounts  Payable  in  the  general 
ledger  should  be  the  same  as  the  total  of  all  the  balances  due  creditors  in  a  sub- 
sidiary ledger.  After  the  Trial  Balance  from  the  general  ledger  has  been  proved, 
the  balances  in  the  subsidiary  ledger  should  be  listed  and  the  total  proved  with 
the  balance  of  the  Accounts  Payable  account. 


EXERCISES  281 

NOTES  RECEIVABLE  DISCOUNTED  ACCOUNT 

§  310.  The  Purpose  of  this  Account  is  to  show  the  balance  of  unpaid 
notes  receivable  which  have  been  discounted.  When  a  note  receivable  is  discounted, 
the  holder  guarantees  payment  at  maturity  by  his  endorsement;  this  creates  a 
"contingent"  liability.  Contingent  liabilities  should  be  recorded  in  the  ledger 
and  shown  on   the   Balance  Sheet. 

Debit  this  Account:  Credit  this  Account: 

^  I.     For  the  face  of  each  discounted  ^  2.     For  the  face  of  each  note  receiv- 

note    receivable   when    it    has  able  discounted;    this  entry  is 

been  paid  by  the   maker;   no  made   at    the    time    the   note 

notice   of   protest   at    matur-  is  discounted, 
ity  indicates  payment. 

^  3.  The  Balance  of  the  Notes  Receivable  Discounted  Account  shows  the  amount 
of  unpaid  notes  which  have  been  discounted;  it  is  shown  as  a  contingent  liability 
on  the  Balance  Sheet  or  as  a  deduction  from  the  Notes  Receivable  account  (Illus- 
tration No.  130). 

Wlien  a  note  or  accepted  draft  is  received,  its  value  is  recorded  in  the  Notes  Receivable  account 
and  should  remain  there  until  collected  or  protested.  When  a  note  receivable  is  discounted,  Cash 
is  debited  and  the  Notes  Receivable  Discounted  account  credited.  No  notice  of  protest *at  maturity 
indicates  collection;  hence  the  amount  of  the  note  receivable  should  be  taken  out  of  the  Notes 
Receivable  account.  This  requires  an  entry  in  the  general  journal  in  which  Notes  Receivable  Dis- 
counted is  debited  and   Notes  Receivable  credited. 

Should  a  note  which  has  been  discounted  be  protested,  the  one  who  discounted  it  will  be  required 
to  issue  his  check  to  the  holder  for  the  face  of  the  note,  interest  if  any,  and  protest  fees;  this  check  is 
recorded  as  a  debit  to  the  Protested  Notes  Receivable  account.  At  the  same  time  the  lace  of  the  note 
receivable  should  be  taken  out  of  the  Notes  Receivable  account  by  an  entry  in  the  general  journal 
in  which  Notes  Receivable  Discounted  is  debited  and  Notes  Receivable  credited. 

Exercise  No.  95,  Sale  of  Branch  Store 

The  Allyn  Trading  Company,  a  corporation,  is  operating  a  branch  store  in 
another  city.  Robert  Montgomery,  the  manager  of  the  branch  store,  wishes  to 
purchase  it,  and  it  is  agreed  that  if  he  can  form  a  corporation  to  take  over  the  assets 
of  the  branch  store,  the  Allyn  Trading  Company  will  accept  stock  in  the  new  cor- 
poration as  part  payment.  The  inventory  of  the  branch  store  shows  the  net  assets 
to  be  $22,550.00. 

Mr.  Montgomery  applies  for  and  secures  a  charter  for  the  Montgomery  Mer- 
cantile Company  with  a  capital  stock  of  $25,000.00.  The  Allyn  Trading  Company 
agrees  to  accept  this  amount  for  the  branch  store,  to  be  paid  as  follows:  cash, 
$5,000.00;  stock  in  the  Montgomery  Mercantile  Company,  $5,000.00;  three  notes 
for  $5,000.00  each,  with  interest  at  six  per  cent  from  date,  due  in  six,  twelve,  and 
eighteen  months  respectively. 

Make  in  journal  form  the  entries  necessary  to  record  this  transaction  on  the  books  of  the 
Allyn  Trading  Company  under  date  of  December  i,  192.  .,  assuming  that  the  branch  store  accounts 
appear  on  the  books  of  the  Allyn  Trading  Company  as  Branch  Store  Inventory,  Dr.,  $13,651.75; 
Branch  Store  Purchases,  Dr.,  $15,409.11;    and  Branch  Store  Sales,  Cr.,  $19,571.50. 

Exercise  No.  96,  Constructing  Selling  Expense  Accounts 

Open  accounts  on  a  sheet  of  ledger  paper  with  Advertising  Expense,  Ad- 
vertising Material,  Salaries  in  the  Selling  Department,  Traveling  Expense,  Ware- 
house Material,  Warehouse  Expense,  Delivery  Expense,  and  Freight  Out,  and 
record  at  least  three  transactions  in  each  account;  indicate  the  nature  of  each 
item  in  the  explanation  column  of  the  account  in  which  it  is  recorded. 


282  EXERCISES 

Exercise  No.  97,  Note  Receivable  Discounted. 

Show,  in  journal  form,  the  entries  necessary  to  record  a  note  receivable  (a) 
when  received  from  a  customer  to  apply  on  account;  (b)  when  discounted  at  the 
bank;  (c)  when  the  discounted  note  is  paid  by  the  maker;  (e)  when  the  discounted 
note  is  not  paid  but  is  renewed;    (f)  when  the  discounted  note  is  protested. 


Exercise  No.  98,  Agent  and  Principal. 

The   following   transactions  were   completed   by   the  Southern   School   Book 
Depository,  agent  for  the  Davis  Publishing  Company: 

Jan.    I.     Received    from   the    Davis    Publishing   Company   500    Davis   law    texts 
at  $1.00. 
10.     Sold  the  College  Book  Store,  City,  100  law  texts  at  $1.00. 
15.     Paid  insurance  on  the  stock  of  law  texts,  $12.50. 

25.  Received  from  the  Davis  Publishing  Company  500  law  texts  at  $1.00. 

26.  Sold  the  Central  High  School,  City,  200  law  texts  at  $1.00. 

27.  Paid  $25.50  freight  and  drayage  on  the  books  received  on  the  25th. 
Feb.    10.'  Sold  Smith  Bros.,  Kent,   150  law  texts  at  $1.00.     Paid  express,  $1.00. 

25.  Sold  the  Lincoln  High  School,  Lincoln,  100  law  texts  at  $1.00. 

Mar.    5.  Sold  the  Central  Business  College,  City,  200  law  texts  at  $1.00. 

10.  Received  from  the  Davis  Publishing  Company  500  law  texts  at  $1.00. 

11.  Paid  freight  and  drayage  on  law  texts  received  March  10,  $27.65. 

20.  Received  from  the  Lincoln  High  School  five  law  texts  which  were 
delivered  in  a  damaged  condition ;  paid  express  40c.  Returned  these 
to   the  Davis  Publishing  Company,  paying  express  50c. 

31.  Rendered  Davis  Publishing  Company  a  report,  and  sent  check  for  the 
balance  due;   commission,  123/^%  of  net  sales. 

1.  Record  in  journal  form  the  above  transactions,  post  and  make  the  report 
of  the  bookkeeper  of  the  Southern  School  Book  Depository. 

2.  Record  the  same  transactions  as  they  would  be  recorded  by  the  book- 
keeper of  the  Davis  Publishing  Company. 


QUESTIONS 

1.  Why  is  it  advisable  for  a  merchant  who  does  a  considerable  volume  of  business 

to  classify  the  selling  expense  through  special  accounts? 

2.  (a)  What  is  the  difference  between  Freight  In  and  Freight  Out?     (b)  How  is 

each  shown  on  the  Statement  of  Profit  and  Loss? 

3.  Explain  why  it  is  advisable  for  a  manufacturer  who  makes  a  delivered  sale 

price,  to  credit  Freight  Out  with  the  amount  of  the  freight  at  the  time  the 
sale  is  made,  and  debit  the  Freight  Out  account  when  the  freight  is  paid. 

4.  Explain  the  two  methods  for  recording  transactions  with  a  branch  store. 

5.  Who  is  an  agent? 

6.  Who  is  a  principal? 

7.  What  is  the  purpose  of  the  agent's  account  with  the  principal?      the  prin- 

cipal's account  with  the  agent? 

8.  Will  all  the  debits  on  the  agent's  account  with  the  principal  appear  as  credits 

on  the  principal's  account  with  the  agent? 

9.  Why  is  a  liability  incurred  when  a  note  receivable  is  discounted? 

10.     How  is  the  liability  incurred  in  question  9  shown  on  the  Balance  Sheet? 


Chapter  XXX 

SPECIAL  RULING  IN  BOOKS  OF  ACCOUNT 

The  Purpose  of  this  Chapter  is  to  explain  the  use  and  advantage  of  special 
columns  in  books  of  original  entry  through  illustrations  showing  transactions 
recorded  in  them.  A  printed  statement  of  the  transactions  recorded  in  the  illus- 
trations is  given  that  the  student  may  check  the  transactions  with  the  entries. 
The  method  of  posting  from  the  special  columns  in  each  book  of  original  entry  is 
explained  by  requiring  the  student  to  post  from  the  illustrations. 

§311.  Business  Transactions  are  recorded  in  books  of  original  entry  and 
posted  as  they  occur  and  in  the  order  of  their  occurrence.  When  a  number  of  trans- 
actions affect  the  same  account,  much  time  can  be  saved  by  providing  a  special 
column  in  each  book  of  original  entry  which  contains  a  record  of  transactions 
affecting  the  account.  In  a  mercantile  business,  the  usual  books  of  original  entry 
are  (a)  purchases  journal,  (b)  returned  purchases  journal,  (c)  sales  journal,  (d) 
returned  sales  journal,  (e)  cash  book,  or  separate  cash  receipts  and  cash  payments 
journals,  (f)  notes  receivable  journal,  (g)  notes  payable  journal,  and  (h)  general 
journal.  In  addition  to  these  books  of  original  entry  a  number  of  auxiliary  books 
may  be  needed;    these  include  the  petty  cash  book,  check  book,  and  pay  roll  book. 

§  312.  Petty  Cash  Fund  refers  to  the  fund  provided  for  payments  of  small 
amounts  when  all  cash  received  is  deposited  in  the  bank,  and  all  payments  are  made 
by  check.  The  cash  needed  for  this  fund  is  secured  by  check;  the  money  re- 
ceived when  the  check  is  cashed  is  kept  in  the  safe  and  used  for  paying  obligations 
where  the  amount  is  small,  usually  less  than  $i.oo.  The  bookkeeper  requires  a 
receipt  for  each  payment  from  the  petty  cash  fund.  The  Petty  Cash  Fund  account 
is  debited  for  the  amount  of  the  check  at  the  time  it  is  issued.  Expenditures  from 
the  petty  cash  fund  are  recorded  in  the  petty  cash  book.  When  the  fund  is  ex- 
hausted, a  check  is  issued  to  renew  it.  This  check  is  debited  to  the  accounts  affected 
by  the  expenditures  as  shown  by  the  petty  cash  book.  The  Petty  Cash  Fund  ac- 
count in  the  general  ledger  will  show  the  amount  of  the  petty  cash  fund;  this  may 
be  $20.00,  $50.00  or  $100.00,  depending  on   the  desires  of  the  management. 

§  313.  The  Petty  Cash  Book  is  an  auxiliary  book  wjiich  contains  a  record 
of  expenditures  from  the  petty  cash  fund.  W'hen  these  expenditures  affect  a  num- 
ber of  expense  accounts,  special  columns  should  be  provided  for  each  account 
in  the  same  manner  as  special  columns  are  provided  on  the  payments  side  of  the 
cash  book.  The  petty  cash  book  should  be  ruled  when  the  petty  cash  fund  is 
exhausted.  The  amount  of  the  check  to  renew  the  fund  should  be  sufficient  to 
bring  it  up  to  the  balance  of  the  Petty  Cash  Fund  account  in  the  general  ledger, 
which  is  the  amount  decided  upon  as  the  petty  cash  fund.  At  the  close  of  the 
fiscal  period,  the  petty  cash  book  should  be  balanced,  the  amount  of  the  fund  on 
hand  carried  down  below  the  ruling,  and  the  expenditures  debited  to  the  proper 
operating  accounts  in  the  general  journal,  otherwise  these  expenditures  would 
not  be  shown  on  the  reports.  Illustration  No.  119  shows  a  petty  cash  book  with 
seven  amount  columns;    the  use  of  these  columns  is  explained  by   the  headings. 

283 


284 


SPECIAL-COLUMN  PURCHASES  JOURNAL 


TRt^SACTIONS  recorded  in  the  ILLUSTRATIONS 

§  314.  The  Books  of  Account  shown  in  Illustrations  Nos.  111-120,  con- 
tain a  record  of  the  transactions  performed  by  the  Arnold  Drug  Store  during  the 
month  of  December.  The  use  of  the  special  columns  in  each  illustration  can  be 
better  understood  by  comparing  each  entry  with  the  transaction. 


December  2 

Paid  rent  for  the  month,  $75.00,  by  our  check  No.  63. 

Sold  Miller  &  Barr,  Canton,  per  sales  invoice  No.  77,  drugs,  $102.74,  sundries, 
$54.16;  terms,  2%  trade  acceptance,  30  days.  Received  in  payment  of  this  in- 
voice, less  2%  discount,  their  30-day  trade  acceptance  payable  at  the  Citizens' 
Bank  of  Canton. 

Received  from  Williams  Pharmacy  in  payment  for  sales  invoice  No.  60,  a 
60-day  note,  $287.11,  dated  November  15,  signed  by  J.  B.  Macklin,  payable  at 
the  City  National  Bank,  with  interest  at  6%  from  date;  allowed  them  credit  for 
the  accrued  interest  on  the  note. 

Gave  Tanner  &  Co.  our  15-day  note  for  $217.25,  payable  at  the  City  National 
Bank,  dated  November  30,  with  interest  at  6%  from  date,  in  payment  for  pur- 
chases invoice  No.  15. 

Paid  $4.00  from  the  petty  cash  fund  for  stamps  to  be  used  in  the  ofhce. 

Accepted  John  D.  Park  &  Son's  60-day  trade  acceptance  for  $557.75,  payable 
at  the  City  National  Bank,  in  payment  for  purchases  invoice  No.  20  less  3%  dis- 
count as  per  terms. 


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Illustration  No.  iii.  Purchases  Journal. 

EXPLANATION.  The  method  of  recording  is  the  same  as  in  other  purchases  journals 
illustrated  in  preceding  chapters,  except  that  a  record  is  kept  of  the  merchandise  purchased  for  two 
separate  departments,  as  indicated  by  the  printed  headings  at  the  top  of  the  amount  columns.  At 
the  end  of  the  month,  the  Accounts  Payable  account  is  credited  for  the  total  of  the  first  column, 
the  Drugs  Purchases  account  debited  for  the  total  of  the  second  column,  and  the  Sundries  Pur- 
chases account  debited  for  the  total  of  the  third  column. 


December  4 

Bought  from  Park,  Davidson  &  Co.,  Chicago,  per  purchases  invoice  No.  23, 
dated  December  2,  drugs,  $250.00,  sundries,  $200.00;    terms  2/10,  n/30. 


RETURNED  PURCHASES  JOURNAL 
December  6 


285 


Paid  from  the  petty  cash  fund  95c  for  gasoHne  for  truck  and  $1.05  for  adver- 
tisement in  the  Herald. 

Sold  Armstrong  Drug  Co.,  560  Race  St.,  City,  per  sales  invoice  No.  78,  drugs, 
$84.75,  sundries,  $29.22;    terms,  3/10,  n/60. 

Bought  from  the  Special  Chemical  Co.,  Chicago,  per  purchases  invoice  No.  24, 
dated  December  4,  drugs,  $694.38;    terms,  3/10,  n/30. 

Cash  sales  to  date:    drugs,  $22.50;    sundries,  $6.75. 


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Illustration  No.  112,  Returned  Purchases  Journal. 

EXPLANATION.  This  journal  contains  a  record  of  merchandise  returned  to  creditors; 
the  same  number  of  amount  columns  is  provided  as  in  the  purchases  journal.  At  the  end  of  the 
month,  the  Accounts  Payable  account  is  debited  for  the  total  of  the  first  column,  the  Drugs  Pur- 
chases Returns  account  credited  for  the  total  of  the  second  column,  and  the  Sundries  Purchases 
Returns  account  credited  for  the  total  of  the  third  column. 

December  7 

Gave  Armstrong  Drug  Co.  our  credit  memorandum  No.  4,  for  sundries  sold 
them  on  the  6th  and  returned,  $1.25. 

Proved  cash  (balance,  $3,357-92),  and  posted.  All  cash  on  hand  is  deposited 
in  the  bank  each  time  cash  is  proved. 

December  9 

Received  credit  memorandum  No.  56  from  Park,  Davidson  &  Co.  for  sundries 
purchased  on  the  4th  and  returned,  $2.20. 

Received  a  check  from  Brand  &  Wing  for  $109.96  in  payment  for  their  past- 
due  account,  and  56c  interest  on  the  same. 

Received  $11.25  from  Grant  &  Watkins  in  full  for  sales  invoice  No.  76  less 
3%  discount  as  per  terms. 


December  10 

Sold  St.  Cloud  Sanatorium,  St.  Cloud  Heights,  per  sales  invoice  No.  79,  drugs, 
$159.60,  sundries,  $84.60,  f.  o.  b.  our  freight  station;    terms,  3/10,  n /60. 

Paid  $20.90,  express  on  the  shipment  to  the  St.  Cloud  Sanatorium,  by  our 
check  No.  64. 

Received  a  check  from  L.  M.  Kirk  for  $65.15  in  payment  for  his  60-day  note 
dated  October  11,  and  65c  interest,  due  today. 

Paid  $1.75  from  the  petty  cash  fund  for  repairs  on  truck. 

Gave  the  Goodyear  Rubber  Co.,  our  30-day  note  for  $167.25  payable  at  the 
City  National  Bank,  in  full  of  account,  and  6%  interest  on  the  note  in  advance. 

Received  credit  memorandum  No.  18  from  Special  Chemical  Co.  for  drugs 
purchased  on  the  6th  and  returned,  $4.25. 


286 


SPECIAL-COLUMN  SALES  JOURNAL 


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Illustration  No.  113,  Sales  Journal. 

EXPLANATION.  The  method  of  recording  is  the  same  as  in  other  sales  journals  illustrated 
in  preceding  chapters,  except  that  a  record  is  kept  of  the  merchandise  sold  by  two  separate  depart- 
ments, as  indicated  by  the  printed  headings  at  the  top  of  the  amount  columns.  At  the  end  of  the 
month,  the  Accounts  Receivable  account  is  debited  for  the  total  of  the  first  column,  the  Drugs 
Sales  account  is  credited  for  the  total  of  the  second  column,  and  the  Sundries  Sales  account  is 
credited  for  the  total  of  the  third  column. 

December  11 

Sold  Martin  &  Martin,  1471  Elm  St.,  City,  per  sales  invoice  No.  80,  drugs, 
$100.10,  sundries,  $294.40;  terms,  3/10,  n/60. 

December  12 

Paid  $2.50  from  the  petty  cash  fund  for  repairs  on  warehouse  steps. 

Gave  Park,  Davidson  &  Co.,  our  check  No.  65  for  $438.84  in  payment  for 
purchases  invoice  No.  23,  less  credit  for  sundries  returned  on  the  9th  and  discount 
as  per  terms. 

December  13 

Bought  from  Artrip  &  Leeds,  24  Fremont  St.,  City,  per  purchases  invoice 
No.  25,  dated  December  12,  drugs,  $11.21,  sundries,  $203.00;    terms,  5/10,  n/6o. 

Gave  Martin  &  Martin  our  credit  memorandum  No.  5  for  drugs  sold  them 
on  the  nth  and  returned,  $4.50. 

Cash  sales  to  date:   drugs,  $28.19;   sundries,  $18.30. 

December  14 

Bought  from  Tanner  &  Co.,  Kansas  City,  per  purchases  invoice  No.  26,  dated 
December  11,  sundries,  $69.44,  f-  o.  b.  Kansas  City;   terms,  15  days. 

Paid  $6.31,  freight  on  purchase  from  Tanner  &  Co.  received  today,  by  our 
check  No.  66. 

Paid  15c  from  the  petty  cash  fund  to  reimburse  Mr.  Arnold  for  carfare  he  had 
paid  on  a  buying  trip  in  the  West  End. 

Gave  Special  Chemical  Co.  our  check  No.  67  for  $669.43  in  payment  for  pur- 
chases invoice  No.  24,  less  credit  for  drugs  returned  on  the  loth  and  discount  as 
per  terms. 

Withdrew  from  the  bank  by  our  check  No.  68,  $140.00  for  pay  roll  as  follows: 
warehouse  employee,  $10.00;  delivery  truck  driver,  $30.00;  selling  department 
employees,   $60.00;    office  employees,   $40.00. 

Proved  cash  (balance,  $2,315.29)  and  posted. 


RETURNED  SALES  JOURNAL 


287 


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Illustration  No.  114,  Returned  Sales  Journal. 

EXPLANATION.  This  journal  contains  a  record  of  merchandise  returned  by  customers; 
the  same  number  of  amount  columns  is  provided  as  in  the  sales  journal.  At  the  end  of  the  month, 
the  Accounts  Receivable  account  is  credited  for  the  total  of  the  first  column,  the  Drugs  Sales  Re- 
turns account  is  debited  for  the  total  of  the  second  column,  and  the  Sundries  Sales  Returns  account 
debited  for  the  total  of  the  third  column. 

December  16 

Bought  from  Independent  Drug  Co.,  West  End,  City,  per  purchases  invoice 
No.  27,  dated  December  15,  drugs,  $623.50;    terms,  30  days. 

Paid  $3.50  from  the  petty  cash  fund  for  express  on  purchase  received  today; 
the  terms  of  sale  did  not  include  delivery. 

Received  credit  memorandum  No.  11  from  Artrip  &  Leeds  for  merchandise 
purchased  on  the  13th  and  returned:    drugs,  $6.95;    sundries,  $10.00. 

Borrowed  $1,000.00  from  the  City  National  Bank  on  our  three  months'  note 
dated  today;  received  credit  in  the  pass  book  for  the  face  of  the  note  less  6% 
interest. 

Gave  the  City  National  Bank  check  No.  69  for  $217.79  in  payment  for  note 
and  interest  due  on  the  15th. 

Received  $109.34  from  Armstrong  Drug  Co.  in  full  for  sales  invoice  No.  78, 
less  credit  for  sundries  returned  on  the  7th  and  discount  as  per  terms. 

Received  notice  from  Tanner  &  Co.  that  they  had  debited  our  account  with 
$10.00,  amount  of  error  in  purchases  invoice  No.  26. 

December  17 

Sold  Horsley  Bros.,  Lancaster,  per  sales  invoice  No.  81,  sundries,  $31.28; 
terms,  2%  trade  acceptance  30  days. 

L.  A.  Arnold,  S.  J.  Moore,  A.  Y.  Barnes,  R.  W.  Lawson,  and  C.  J.  Barber 
made  application  to  the  Secretary  of  State  to  incorporate  the  drug  business  of  L.  A. 
Arnold  with  a  capital  stock  of  $60,000.00,  consisting  of  six  hundred  shares  common 
stock,  par  value  $100.00  per  share.  L.  A.  Arnold  agreed  to  purchase  two  hundred 
shares  and  each  of  the  other  incorporators,  twenty-five  shares. 

No  entry  is  required  in  the  books  of  account  until  the  charter  has  been  granted. 


December  18 

Received  a  30-day  note  from  J.  M.  McDougal  for  $250.00,  dated  December 

16,  payable  at  the  Second  National  Bank,  in  full  of  account;    gave  him  credit  for 
the  face  of  the  note  less  6%  interest  in  advance. 

Bought  from  P.  W.  Drackett  &  Sons  Co.,  Spring  Grove  Ave.,  City,  per  pur- 
chases invoice  No.  28,  dated  December  17,  drugs,  $141.60;    terms,  3/10,  n/30. 

Paid  $3.75  from  the  petty  cash  fund  for  Christmas  decorations  for  window. 
Received  from  Horsley  Bros,  their  30-day  trade  acceptance,  dated  December 

17,  payable  at  the  Lancaster  National  Bank,  in  payment  for  sales  invoice  No.  81 
less  discount  as  per  terms. 


SPECIAL-COLUMN  CASH  BOOK 


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Illustration  No.  115,  Receipts  Side  of  Cash  Book. 

EXPLANATION.  This  illustration  shows  a  record  of  cash  received.  The  printed  headings 
explain  the  use  of  the  special  columns.  All  cash  received  is  deposited,  and  all  cash  payments  made 
by  check.  An  account  is  kept  with  the  bank  in  the  general  ledger;  at  the  end  of  each  month  it  is 
debited  with  the  total  deposits  and  credited  with  the  total  checks  issued  during  the  month. 


December  19 

Sold  Williams  Pharmacy,   8240  Cedar  St.,   City,   per  sales  invoice  No.   82, 
drugs,   $68.27,   sundries,   $74.50;    terms,   3/10,   n/6o. 


December  20 

Received  a  check  for  $257.77  from  St.  Cloud  Sanatorium  in  full  for  sales  in- 
voice No.  79,  including  freight,  less  discount  as  per  terms. 
Cash  sales  to  date:    drugs,  $43.40;   sundries,  $33.75. 

December  21 

Received  credit  memorandum  No.  32  from  P.  W.  Drackett  &  Sons  Co.  for 
drugs  purchased  on  the  i8th  and  returned,  $2.90. 

Gave  Horsley  Bros,  our  credit  memorandum  No.  6  for  sundries  sold  them  on 
the  17th  and  returned,  $1.00. 

Proved  cash  (balance,  $3,526.76)  and  posted. 


December  23 

Sales  as  follows:  Independent  Hospital,  Third  and  Locust,  City,  per  sales 
invoice  No.  83,  drugs,  $122.44,  sundries,  $77.46;  terms,  3/10,  n/6o.  Haef' er's 
Pharmacy,  Hunt  and  Broadway,  City,  per  sales  invoice  No.  84,  drugs,  $101.23, 
sundries,  $173.10;    terms,  3/10,  n /60. 

Gave  the  Special  Chemical  Co.  our  30-day  note  for  $275.00,  payable  at  the 
City  National  Bank,  with  interest  at  6%  from  date,  in  payment  for  purchases 
invoice  No.  22. 


SPECIAL-COLUMN  CASH  BOOK 


289 


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^  ^;z..<i^-;4.— </^-'^;>'?<7'2-,£-^?^-^Zis/ 


Date 


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Illustration  No.  116,  Payments  Side  of  Cash  Book. 

EXPLANATION.  This  illustration  shows  a  record  of  cash  paid,  all  payments  being  made 
by  check.  The  printed  headings  explain  the  use  of  the  special  columns.  The  posting  at  the  end  of 
the  month  is  the  same  as  from  the  payments  side  of  any  cash  book,  except  that  the  bank  is  credited 
with  the  total  payments  instead  of  the  account  with  Cash. 

December  23 

Received  $378.30  from  Martin  &  Martin  in  full  for  sales  invoice  No.  80,  less 
credit  for  drugs  returned  on  the  13th  and  discount  as  per  terms. 

Gave  Artrip  &  Leeds  our  check  No.  70  for  $187.40  in  payment  for  purchases 
invoice  No.  25,  less  credit  for  drugs  and  sundries  returned  on  the  i6th  and  dis- 
count as  per  terms. 

December  26 

Bought  from  Park,  Davidson  &  Co.,  Chicago,  per  purchases  invoice  No.  29, 
dated  December  23,  drugs,  $60.40,  sundries,  $309.60;    terms,  2/10,  n/30. 

Gave  Tanner  &  Co.  our  check  No.  71  for  $79.44  in  payment  for  purchases 
invoice  No.  26,  plus  error  of  the  i6th. 

Sales  as  follows:  Smith  &  Schott,  205  E.  Pearl  St.,  City,  per  sales  invoice  No. 
85,  drugs,  $98.98,  sundries,  $36.42;  terms,  3/10,  n/6o.  Miller  &  Barr,  Canton, 
per  sales  invoice  No.  86,  drugs,  $10.87,  sundries,  $24.71;  terms,  2%  trade  accept- 
ance, 30  days. 

Paid  $1.00  from  the  petty  cash  fund  for  electric  bulbs  to  be  used  in  the  office. 

Sold  the  Ford  delivery  truck  to  Sears,  Ward  &  Co.  for  $750.00.  Received  in 
payment  their  check  for  $244.22,  and  a  60-day  note  for  $503.76,  signed  by  John 
R.  Bates,  dated  November  26,  with  interest  at  6%  from  date;  allowed  them  credit 
for  the  accrued  interest  on  the  note. 


December  27 

Boughtfrom    John  D.  Park  &  Son,  Erie,  per  purchases  invoice  No.  30,  dated 

December  26,  sundries,  $263.46;    terms,  3%  trade  acceptance,  60  days. 

* 


290 


NOTES  RECEIVABLE  AND  PAYABLE  JOURNALS 


Notes  Receivable 


Dale 
Rec-il 


FROM  WHOM  RECEIVED 

(Pcnaul  Account  Credited) 


Fice  of  Paper 
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INTEREST  EARNED 


MAKER  (Note)    DRAWEE  (Drift) 


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Illustration  No.  117,  Left  Page  of  Notes  Receivable  Journal. 

EXPLANATION.  This  illustration  shows  a  record  of  notes  and  accepted  drafts  received  by 
the  business.  Theamount  columns  indicate  that  it  is  used  as  a  book  of  original  entry,  hence  the  notes 
are  not  recorded  in  the  general  journal.  The  printed  heading  at  the  top  of  each  amount  column 
indicates  the  account  affected. 

Notes  Payable  ^ 


IN  WHOSE  FAVOR 

tPcnoBi]  Accsont  DcbtlW) 


Fic'e  of  Paper 
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INTEREST  COST 


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Illustration  No.  118,  Left  Page  of  Notes  Payable  Journal. 

EXPLANATION.  This  illustration  shows  a  record  of  notes  issued  and  drafts  accepted  by  the 
business.  The  amount  columns  indicate  that  it  is  used  as  a  book  of  original  entry,  hence  the  notes 
are  not  recorded  in  the  general  journal.  The  printed  heading  at  the  top  of  each  amount  column  in- 
dicates the  account  affected. 

Sold  Court  House  Pharmacy,  988  Walnut  St.,  City,  per  sales  invoice  No.  87, 
drugs,  $334.29,  sundries,  $78.68;    terms,  3/10,  n/60. 

Gave  P.  W.  Drackett  &  Sons  Co.  our  check  No.  72  for  $134.54  in  payment 
for  purchases  invoice  No.  28,  less  credit  for  drugs  returned  on  the  21st  and  discount 
as  per  terms. 

Cash  sales  to  date :    drugs,  $71.35;  sundries,  $24.15. 

December  28 

Gave  the  Court  House  Pharmacy  our  credit  memorandum  No.  7  for  mer- 
chandise sold  them  on  the  27th  and  returned:    drugs,  $3.50;   sundries,  $1.50. 
Issued  check  No.  73  for  $18.65  to  renew  the  petty  cash  fund. 
Proved   cash    (balance,   $3,824.75),   and   posted. 

December  30 

Sales  as  follows:  Market  Prescription  Pharmacy,  2013  Main  St.,  City,  per 
sales  invoice  No.  88,  drugs,  $202.77;  terms,  3/io,  n/60.  Model  Pharmacy,  604 
Smith  St.,  City,  per  sales  invoice  No.  89,  drugs,  $135.60;  sundries,  $99.05;  terms, 
3/10,  n/60. 

Received  from  St.  Cloud  Sanatorium  a  60-day  note  for  $400.00,  signed  by 
B.  C.  Waters,  Proprietor,  dated  January  i,  to  apply  on  account;  gave  them  credit 
for  the  face  of  the  note  less  6%  interest  in  advance. 

December  31 

Received  a  check  for  $153.76  from  Miller  &  Barr  in  payment  for  trade  ac- 
ceptance dated  December  2. 


PETTY  CASH  BOOK 


291 


Notes  Receivable 


DATE  OF  PAPER 


A. 


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WIIFRF.  PAYABLE 


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Illustration  No.  117,  Right  Page  of  Notes  Receivable  Journal. 

EXPLANATION.  At  the  end  of  the  month  the  Notes  Receivable  account  is  debited  for  the 
total  notes  received,  and  the  Accounts  Receivable  account  credited  for  the  total  credits  allowed 
customers  on  account  of  these  notes;  Interest  Earned  is  debited  or  credited  for  the  difference 
between  these  totals. 

Notes  Payable 


DATE  OF  PAPER  I      Tim 
Year    I  Month  &  Day       R°r 


WHERE  PAYABLE 


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Illustration  No.  118,  Right  Page  of  Notes  Payable  Journal. 

EXPLANATION.  At  the  end  of  the  month  the  Notes  Payable  account  is  credited  for  the  total 
notes  issued,  and  the  Accounts  Payable  account  debited  for  the  total  credits  allowed  the  business 
on  account  of  these  notes;  Interest  Cost  is  debited  or  credited  for  the  difference  between  these 
totals. 


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Date 


Xxplanatioru 


BeceipLf 


Buying 
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Zxpense 


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Expense 


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Illustration  No.  119,  Petty  Cash  Book. 

EXPLANATION.  This  illustration  shows  a  record  of  cash  payments  from  the  petty  cash 
fund.  The  headings  at  the  top  of  the  amount  columns  indicate  the  accounts  affected :  these  columns 
are  the  same  as  on  the  payments  side  of  the  cash  book,  except  that  a  column  for  Salaries  in  the 
Selling  Department  is  not  needed  in  the  petty  cash  book.  The  total  of  each  column  may  be  trans- 
ferred to  the  cash  book  at  the  end  of  the  month,  or  at  the  time  the  petty  cash  fund  is  renewed. 


292 


SPECIAL-COLUMN  GENERAL  JOURNAL 


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Illustration  No.  120,  General  Journal. 

EXPLANATION.  The  printed  headings  explain  the  use  of  the  special  columns.  Columns 
may  be  provided  for  recording  returned  purchases  and  returned  sales  if  these  transactions  do  not 
occur  with  sufficient  frequency  to  require  a  returned  purchases  journal  and  a  returned  sales  journal. 
The  equality  of  the  debits  and  credits  recorded  in  the  columns  should  be  proved  at  the  conclusion 
of  each  page  before  forwarding  the  totals. 

December  31 

Sold  Martin  &  Martin,  1471  Elm  St.,  City,  per  sales  invoice  No.  90,  drugs, 
$204.09,   sundries,   $299.02;     terms,   3/10,   n/6o. 

Withdrew  from  the  bank  by  our  check  No.  74,  $125.00  for  pay  roll  as  follows: 
warehouse  employee,  $10.00;  delivery  truck  driver,  one  week,  $15.00;  selling 
department  employees,  $60.00;    office  employees,  $40.00. 

Paid  for  advertising  service,  $125.00,  by  our  check  No.  75. 

Gave  Mr.  Arnold  a  check  for  $150.00,  salary  for  the  month,  distributed  as 
follows:  Buying  Expense,  Salaries  in  Selling  Department,  and  Administrative 
Expense,  each  one-third. 

Cash  sales  to  date:   drugs,  $44.20;   sundries,  $20.20. 

Proved  cash  (balance,  $3,642.91)  and  posted. 


EXERCISE 


293 


Exercise  No.  99,  Recording  Transactions. 

The  purpose  of  this  exercise  is  (a)  to  familiarize  the  student  with  the  special 
columns  shown  in  the  illustrations  by  having  him  check  the  transactions  recorded 
in  them,  (b)  to  provide  practice  in  posting  from  these  special  ruled  books  of  original 
entry,  and  (c)  to  provide  practice  in  recording  transactions  in  books  of  account 
with  special  ruling  similar  to  the  illustrations.  The  work  required  should  be  com- 
pleted in  the  following  order: 

1.  Check  the  transactions   for  December  with   the   illustrations. 

2.  Open  (on  ledger  paper)  the  accounts  given  in  the  list  below.  Arrange  in 
the  order  given,  and  allow  the  number  of  lines  indicated  by  the  number  in  paren- 
thesis after  the  name  of  each  account.  The  amount  given  after  the  name  of  the 
account  indicates  the  balance  on  the  November  30  Trial  Balance  of  the  Arnold  Drug 
Store. 

General  Ledger 


City  National  Bank  (7),  Dr.,  13,403.67. 

Petty  Cash  Fund  (4),  Dr.,  $20.00. 

Notes  Receivable  (5),  Dr.,  $64.50. 

Accounts  Receivable  (8),  Dr.,  $1,057.67. 

Reserve  for  Doubtful  Accounts  (4). 

Accrued  Interest  Earned  (4). 

Subscribers  to  Capital  Stock  (4). 

Office  Equipment  (5),  Dr.,  $750.00. 

Reserve  for  Dep.  of  Office  Equipment  (4). 

Store  Fixtures  (4),  Dr.,  $1,803.22. 

Reserve  for  Depreciation  of  Store  Fixtures  (4). 

Delivery  Equipment  (4),  Dr.,  $1,750.00. 

Reserve  for  Dep.  of  Delivery  Equipment  (4). 

Goodwill  (4). 

Prepaid  Interest  Cost  (4). 

Office  Supplies  (4). 

Advertising  Material  (4). 

Delivery  Truck  Supplies  (4). 

Organization  Expense  (4). 

Notes  Payable  (4). 

Accounts  Payable  (8),  Cr.,  $1,233.66. 

Accrued  Interest  Cost  (4). 

Accrued  Warehouse  Rent  (4). 

Accrued  Advertising  Expense  (4). 

Deferred  Credit  to  Interest  Earned  (4). 

L.  A.  Arnold,  Capital  (7),  Cr.,  $15,000.00. 

Capital  Stock  (4). 

Unissued  Capital  Stock  (4). 


Subscriptions  to  Capital  Stock  (4). 
Drugs — Sales  (7),  Cr.,  $20,652.90. 
Drugs — Sales  Returns  (6),  Dr.,  $67.42. 
Drugs — Inventory,  Jan.  i   (4),  Dr.,  $5,437.98. 
Drugs — Inventory,  December  31  (4). 
Drugs — Purchases  (6),  Dr.,  $17,901.10. 
Drugs — Freight  In  (6),  Dr.,  $46.15. 
Drugs — Purchases    Returns    (6),    Cr.,    $45.65. 
Sundries — Sales  (7),  Cr.,  $15,868.03. 
Sundries — Sales  Returns  (6),  Dr.,  $37.50. 
Sundries — Inventory,  Jan.  i  (4),  Dr.,  $3,987  .62 
Sundries — Inventory,  December  31  (4). 
Sundries — Purchases  (7),  Dr.,  $10,298.80. 
Sundries — Freight  In  (6),  Dr.,  $102.40. 
Sundries — Purchases  Returns  (6),  Cr.,  $89.22. 
Buying  Expense  (6),  Dr.,  $529.06. 
Selling  Expense  (4). 

Advertising  Expense  (8),  Dr.,  $1,114.98. 
Warehouse  Expense  (7),  Dr.,  $294.10. 
Delivery  Expense  (8),  Dr.,  $374.84. 
Salaries  in  Selling  Dept.  (6),  Dr.,  $1,707.75. 
Loss  on  Doubtful  Accounts  (4). 
Administrative  Expense  (8),  Dr.,  $2,149.63. 
Purchases  Discount  (7),  Cr.,  $632.47. 
Interest  Earned  (10),  Cr.,  $32.90. 
Sales  Discount  (8),  Dr.,  $436.35. 
Interest  Cost  (9),  Dr.,  $220.09. 
Profit  and  Loss  (25). 


Accounts  Receivable  Ledger 


Armstrong  Drug  Co.  (6). 
Brand  &  Wing  (4),  Dr.,  $109.40. 
Court  House  Pharmacy  (4). 
Grant  &  Watkins  (5),  Dr.,  $11.60 
Haefner's  Pharmacy  (4). 
Horsley  Bros.  (6). 
Independent  Hospital  (4) 


J.  M.  McDougal  (4),  Dr.,  $248.75. 
Market  Prescription  Pharmacy  (8). 
Martin  &  Martin  (6). 
Miller  &  Barr  (5). 
Model  Pharmacv  (4). 
Smith  &  Schott'(4). 

St.  Cloud  Sanatorium  (5),  Dr.,  $400.00. 
Williams  Pharmacy  (5),  Dr.,  $287.92. 


Accounts  Payable  Ledger 


Artrip  &  Leeds  (6). 
P.  W.  Drackett  &  Sons  Co.  (6). 
Goodyear  Rubber  Co.  (4),  Cr.,  $166.41. 
Independent  Drug  Co.  (4). 


Park,  Davidson  &  Co.  (6). 
John  D.  Park  &  Son  (5),  Cr.,  $575.00. 
Special  Chemical  Co.  (7),  Cr.,  $275.00. 
Tanner  &  Co.  (6),  Cr.,  $217.25. 


294  EXERCISE 

3.  Post  the  entries  in  the  illustrations  including  the  totals  of  the  special 
columns,  and  take  a  Trial  Balance  from  the  general  ledger,  the  accounts  payable 
ledger  and  the  accounts  receivable  ledger. 

4.  Prepare  journal  entries  for  the  following: 

(a)  Drugs  in  stock,  December  31,  $7,315.82;   sundries  in  stock,  December  31,  $1,238.54. 

(b)  Interest  accrued  on  notes  receivable,  $5.14. 

(c)  Interest  accrued  on  notes  payable,  37c;    warehouse  rent  for  December  unpaid,  $50.00;    ad- 

vertising service  for  two  months  unpaid,  $35.00. 

(d)  Interest  on  notes  payable  paid  in  advance,  $12.75;   office  supplies  on  hand,  $127.60;   advertis- 

ing material  on  hand,  $139.44;  gasoline  and  other  supplies  for  delivery  truck  on  hand,  $42.1 1. 

(e)  Interest  on  notes  receivable  collected  in  advance,  $4.63. 

(f)  Reserves:    Ofifice  Equipment,  3%;    Store  Fixtures,  3%;    Delivery  Equipment,  5%;    Doubt- 

ful Accounts,  1%  of  Accounts  Receivable. 

5.  Post  these  (a-f)  entries  to  the  accounts  on  the  ledger  sheets  and  take  a 
second  Trial  Balance. 

6.  Prepare  a  Balance  Sheet  and  Statement  of  Profit  and  Loss  from  the  Trial 
Balance  taken  after  the  adjusting  entries  have  been  posted. 

7.  Make  the  closing  journal  entries,  post  these,  rule  all  accounts  that  balance, 
and  take  a  post-closing  Trial  Balance.     This  should  show  the  following: 

City  National  Bank,  Dr.,  $3,642.91;  Petty  Cash  Fund,  Dr.,  $20.00;  Notes  Receivable,  Dr., 
$1,471.52;  Accounts  Receivable,  Dr.,  $2,139.48;  Reserve  for  Doubtful  Accounts,  Cr.,  $21.39; 
Office  Equipment,  Dr.,  $750.00;  Reserve  for  Depreciation  of  Office  Equipment,  Cr.,  $22.50;  Store 
Fixtures,  Dr.,  $1,803.22;  Reserve  for  Depreciation  of  Store  Fixtures,  Cr.,  $54.10;  Delivery  Equip- 
ment, Dr.,  $1,000.00;  Reserve  for  Depreciation  of  Delivery  Equipment,  Cr.,  $50.00;  Notes  Pa^'- 
able,  Cr.,  $2,000.00;  Accounts  Payable,  Cr.,  $1,256.96;  Accrued  Warehouse  Rent,  Cr.,  $50.00; 
L.  A.  Arnold,  Capital,  Cr.,  $16,213.58;  Drugs — Inventory,  December  31,  Dr.,  $7,315.82;  Sundries 
— Inventory,  December  31,  Dr.,  $1,238.54;  Advertising  Expense,  Dr.,  $139.44,  Cr.,  $35.00; 
Delivery  Expense,  Dr.,  $42.11;  Administrative  E.xpense,  Dr.,  $127.60;  Interest  Earned,  Dr.,  $5.14, 
Cr.,  $4.63;    Interest  Cost,  Dr.,  $12.75,    Cr.,  37c. 

8.  Record  the  transactions  given  below  in  books  of  original  entry  (loose 
sheets  of  paper)  ruled  similar  to  the  illustrations  in  this  chapter.  The  January 
transactions  will  be  posted  to  the  same  ledger  sheets  used  for  posting  the  December 
transactions. 

MEMORANDA  OF  TRANSACTIONS  FOR  JANUARY 

January  2 

At  a  meeting  of  the  subscribers  to  the  capital  stock  of  the  Arnold  Drug  Com- 
pany, it  was  agreed  to  pay  L.  A.  Arnold  $18,000.00  for  his  interest  in  the  business 
he  has  been  operating,  and  to  assume  all  liabilities  of  the  business.  L.  A.  Arnold 
agreed  to  accept  180  shares  of  stock  in  payment  for  his  interest  and  to  pay  by  check 
one  half  of  his  subscription  for  200  additional  shares,  the  remainder  to  be  paid 
within  thirty  days.  The  other  subscribers  agreed  to  pay  cash  for  one  half  of  the 
stock  subscribed  and  the  balance  within  thirty  days.  L.  A.  Arnold,  S.  J.  Moore, 
A.  Y.  Barnes,  and  R.  W.  Lawson  were  elected  as  the  board  of  directors. 

At  a  meeting  of  the  board  of  directors,  L.  A.  Arnold  was  elected  president  and 
S.  J.  Moore,  secretary-treasurer.  Checks  in  payment  for  one-half  of  the  stock 
subscribed  were  received  as  follows:  L.  A.  Arnold,  $10,000.00;  S.  J.  Moore, 
A.  Y.  Barnes,  R.  W.  Lawson,  and  C.  J.  Barber,  each  $1,250.00.  A  certificate  of 
stock  for  the  180  shares  of  stock  accepted  by  Mr.  Arnold  in  payment  for  his  in- 
terest in  the  business  has  been  issued. 

Below  the  two  journal  entries  required  to  record  the  authorized  capital  stock  and  the  sub- 
scriptions, make  a  third  journal  entry  to  record  the  stock  issued  to  L.  A.  Arnold  in  payment  for  his 
interest  in  the  business  and  the  goodwill;  in  this  entry,  debit  L.  A.  Arnold  Capital  and  Goodwill 
and  credit  Unissued  Capital  Stock.  Enter  the  checks  in  the  cash  book.  You  will  not  be  required 
to  write  the  certificate  of  stock. 


QUESTIONS  295 

January  3 

Paid  M.  F.  Duff,  attorney,  $250,00  for  legal  service  in  connection  with  or- 
ganizing the  corporation  and  securing  the  charter. 

Debit  Organization  Expense. 

Prove  cash  (balance,  $18,392.91)  and  post  the  entries  in  the  cash  book  and  general  journal  to 
the  same  ledger  used  in  December. 

QUESTIONS 

1.  What  is  the  difference  between  a  book  of  original  entry  and  an  auxiliary 

book? 

2.  What  is  the  purpose  of  special  columns  in  books  of  original  entry? 

3.  What  is  the  purpose  of  separate  sales  accounts? 

4.  Why  is  it  necessary  to  provide  special  columns  in  the  purchases  journal  and 

sales  journal  when  separate  sales  and  purchases  accounts  are  maintained? 

5.  Why  is  the  total  of  the  Sales  Discount  column  on  the  receipts  side  of  the 

cash  book,  and  the  total  of  the  Purchases  Discount  column  on  the  pay- 
ments side  of  the  cash  book,  not  used  in  proving  cash? 

6.  To  what  accounts  in  the  general  ledger  is  the  total  of  the  Sales  Discount 

column  on  the  receipts  side  of  the  cash  book  posted?    Why? 

7.  What  effect  will  it  have  on  the  Trial  Balance  if  the  bookkeeper  makes  an 

error  of  $1.00  in  adding  the  Purchases  Discount  column  on  the  payments 
side  of  the  cash  book?    Give  reason  for  your  answer. 

8.  What  is  the  advantage  of  the  notes  receivable  and  notes  payable  journals? 

9.  If  no  Interest  Earned  column  is  provided  in  the  notes  receivable  journal, 

what  entry  will  be  required  if  a  customer  does  not  receive  credit  for  the 
full  amount  of  the  note  because  of  the  interest  involved? 
10.     (a)  Why  does  the  bookkeeper  reconcile  his  bank  account  with  the  statement 
rendered  by  the  bank?     (b)  Describe,  in  detail,  the  method  of  making  this 
reconciliation. 


Chapter  XXXI 

GENERAL  INFORMATION 

The  Purpose  of  this  Chapter  is  to  explain  trade  acceptances  and  the  ac- 
counting procedure  in  connection  therewith,  collateral  security,  power  of  attorney, 
journal  voucher,  exhibits,  schedules,  analytical  statements,  method  of  numbering 
accounts,  and  basis  for  depreciation.  The  student  of  bookkeeping  needs  this 
information  if  he  is  to  complete  successfully  the  work  required  of  him  as  a  book- 
keeper. As  a  business  man,  he  will  need  this  information  so  that  he  may  interpret 
the  reports  submitted  to  him  by  the  bookkeeping  department. 

§  315.  A  Trade  Acceptance  as  defined  by  the  Federal  Resers^e  Board  is 
"a  bill  of  exchange  (time  draft)  drawn  by  the  seller  on  the  purchaser  of  goods  sold, 
and  accepted  by  such  purchaser."  As  explained  in  §94,  it  is  assumed  that  this 
acceptance  is  made  on  the  date  of  purchase,  or  within  a  few  days  thereafter.  The 
principal  difference  between  the  time  draft  and  the  trade  acceptance  is  that  the 
former  is  drawn  and  accepted  at  the  expiration  of  the  time  of  credit,  with  the 
purpose  of  giving  additional  time,  while  the  latter  is  drawn  and  accepted  at  the 
time  of  the  sale,  or  within  a  few  days  thereafter.  The  trade  acceptance  originated 
in  Great  Britain  and  the  countries  of  Continental  Europe  w^here  practically  every 
commercial  transaction  is  financed  by  means  of  a  time  draft.  Its  successful  applica- 
tion in  these  countries  has  brought  about  a  demand  for  its  use  in  the  United  States, 
and  this  is  being  advocated  by  many  leading  business  organizations. 


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Pay  to  the  order  of  Ourselves 

A-'2ar^^..3'::^^^t:f^2j^:^^  Dollars,  ($  / ^^2"!^  ) 

The  obligation  of  the  acceptor  hereof  arises  out  of  the  jfurcbLe  of  goods  from  the  drawer.     The  drawee  may  accept 
this  bill  payable  at  any  bank,  banker  or  trust  company  in  the  United  States  which  he  may  designate. 


J.  A.  Whitney  &  Co. 


Illustration  No.  121,  Trade  Acceptance. 

§  316.  The  Purpose  of  a  Trade  Acceptance  is  (a)  to  provide  a  better 
evidence  of  the  debt  resulting  from  the  sale  of  merchandise  on  account  than  the 
open  book  account;  (b)  to  provide  commercial  paper  that  may  be  discounted  by 
the  seller;    (c)  to  encourage  prompt  payment  on  the  part  of  the  purchaser. 

^  I.  Open  Book  Account.  The  open  book  account  is  the  seller's  record  of 
his  transactions  with  the  buyer.  It  is  the  result  of  a  business  habit  which  has 
many  disadvantages.  It  forces  the  seller  to  carry  the  financial  burden  of  the  buyer, 
and  ties  up  the  seller's  invested  or  borrowed  capital  for  an  indefinite  period.     As 

296 


GENERAL  INFORMATION  297 

an  asset,  the  open  book  account  is  neither  quick  nor  sure.  At  best,  book  accounts 
are  seldom  available  for  a  loan  of  more  than  50%  of  their  value.  The  book  account 
being  the  seller's  record  of  his  transactions  with  the  buyer,  in  case  of  dispute 
the  burden  of  evidence  is  on  the  seller.  As  sales  are  often  completed  over  the 
counter  or  telephone,  it  is  sometimes  difficult  to  prove  the  amount  of  the  account. 
If  each  sale  on  account  is  closed  by  a  trade  acceptance,  all  of  these  disadvantages, 
and  many  more  not  enumerated,  are  eliminated  and  there  is  a  clear  understand- 
ing between  the  seller  and  the  buyer  as  to  the  amount  of  the  indebtedness,  and 
the  date  of  maturity. 

^2.  A  Better  Class  of  Collateral  Security.  Borrowed  capital  is  usually  ob- 
tained by  discounting  notes  properly  executed  by  the  business,  or  by  discounting 
notes  received  from  customers.  The  National  Banking  law  very  wisely  limits  the 
amount  of  the  loans  to  be  made  to  any  one  business  by  national  banks,  and  prac- 
tically all  of  the  state  banking  laws  now  conform  to  the  national  law.  This  means 
that  the  business  is  limited  as  to  the  amount  of  money  it  can  borrow  on  its  own 
paper.  Notes  given  the  business  by  customers  are  usually  for  an  extension  of  time, 
hence  are  not  the  best  class  of  commercial  paper,  as  a  business  with  a  high  credit 
rating  seldom  has  occasion  to  issue  notes  for  maturing  obligations.  Since  it  is 
necessary  for  the  business  to  become  surety  on  notes  discounted  by  it,  the  borrow- 
ing limit  regulated  by  the  banking  laws  affects  the  discounting  of  notes.  The 
Federal  Reserve  Act  creating  Reserve  banks  has  made  the  trade  acceptance  a 
preferred  class  of  commercial  paper  which  may  be  discounted  to  an  unlimited 
extent  by  the  business,  and  in  no  way  affect  the  borrowing  capacity  in  regard  to 
its  own  or  others'  notes  discounted.  Reserve  banks  are  permitted  to  go  into  the 
market  and  buy  trade  acceptances  direct  if  member  banks  do  not  purchase  and 
rediscount  them.  Being  a  preferred  class  of  security,  the  trade  acceptance  gives 
the  business  a  greater  borrowing  capacity  and  a  smaller  discount  rate  because 
the  better  the  security,  the  less  the  interest  charge. 

^  3.  Prompt  Payment.  One  of  the  principal  objections  to  the  open  book 
account  is  the  ease  with  which  the  buyer  can  secure  an  extension  of  time.  The 
seller  is  under  obligation  to  the  buyer  as  a  customer  and  may  be  forced  to  extend 
the  time  of  payment  even  though  his  better  judgment  would  direct  otherwise. 
The  same  also  applies  to  the  discount  period  where  sales  are  made  subject  to  a 
special  discount  for  prompt  payment.  Many  buyers  will  take  advantage  of  the 
seller  by  allowing  extra  time  to  expire  before  sending  remittance  with  the  hope 
that  the  volume  of  business  given  the  seller  and  the  fear  of  losing  a  good  customer 
will  cause  him  to  allow  the  discount  even  though  the  time  has  expired.  If  each 
sale  on  account  is  closed  by  a  trade  acceptance,  these  and  many  other  annoying 
features  will  be  removed,  because  the  acceptances  may  be  collected  through  the 
bank  should  they  not  be  discounted.  The  average  individual  has  a  high  regard 
for  his  credit  rating  with  the  bank  and,  as  a  rule,  will  pay  an  obligation  maturing 
at  the  bank  quicker  than  he  will  an  open  account. 

§  317.  Accounting  Procedure.  When  a  sale  is  made,  terms  "trade  ac- 
ceptance," the  seller  records  it  in  the  sales  journal  in  the  same  manner  as  a  sale  on 
account.  A  trade  •  acceptance  for  the  amount  of  the  sale  accompanies  the  sales 
invoice  with  a  .request  for  its  acceptance  on  delivery.  The  buyer  records  the 
purchase  in  the  purchases  journal  and  the  accepted  trade  acceptance  in  the  same 
manner  as  an  accepted  draft  or  a  note  payable.  When  the  seller  receives  the  trade 
acceptance  accepted  by  the  buyer,  it  is  recorded  in  the  same  manner  as  an  accepted 
draft  or  a  note  receivable. 

An  accepted  trade  acceptance  is  the  same  as  an  accepted  draft  or  a  note.  Trade  acceptances 
received  and  issued  by  the  business  may  be  recorded  in  the  Notes  Receivable  and  in  the  Notes  Payable 
accounts,  or  they  may  be  recorded  in  a  Trade  Acceptances  Receivable  and  a  Trade  Acceptances  Pay- 
able account;    the  latter  is  considered  the  better  practice. 


298  GENERAL  INFORMATION 

§  318.  A  Power  of  Attorney  is  written  evidence  of  authority  granted  an 
individual  to  act  as  agent  for  another.  One  who  acts  as  agent  without  a  power 
of  attorney  may  be  held  personally  responsible  for  the  contracts  which  he  makes 
for  his  principal.     Illustration  No.  122  shows  one  form  of  power  of  attorney. 


Know  All  Men  By  These  Presents,  That  I,  James  C.  Wilson,  of  the  city  of 
Boston,  county  of  Suffolk,  and  state  of  Massachusetts,  have  made,  constituted,  and  ap- 
pointed, and  by  these  presents  do  make,  constitute  and  appoint  Miss  Margaret  A.  Davidson 
of  the  aforesaid  city,  county,  and  state,  my  true  and  lawful  attorney,  to  act  for  me  and  in 
my  name,  place  and  stead,  in  the  following  transactions  in  connection  with  my  business 
as  retail  clothing  merchant. 

1.  To  draw  checks  against  my  account  in  the  Merchants  National  Bank. 

2.  To  endorse  checks,  drafts,  notes,  or  bills  of  exchange  which  may  require  my 
endorsement  for  deposit  as  cash  or  for  collection  in  the  said  bank. 

3.  To  accept  drafts  or  bills  of  exchange  which  may  be  drawn  on  me  by  those  from 
whom  I  have  purchased  merchandise. 

I  hereby  ratify  and  confirm  all  that  the  said  attorney  may  lawfully  do  or  cause  to  he 
done  by  virtue  of  this  power  of  attorney. 

In  Witness  Whereof,  I  have  hereunto  set  my  hand  and  seal  this  twenty-fifth 
day  of  May,  in  the  year  of  our  Lord  one  thousand  nine  hundred  and  twenty-three. 

{Signed)     JAMES  C.  WILSON.     [Seal] 
Signed,  sealed  and  delivered 
in  the  presence  of 
Paul  Whitelaw.     [Seal] 


Illustration  No.  122,  Power  of  Attorney. 

EXPLANATION.  This  contract  authorizes  Miss  Margaret  A.  Davidson  to  sign  certain 
contracts  for  James  C.  Wilson.  It  is  necessary  for  Mr.  Wilson  to  notify  the  bank  that  Miss  Davidson 
is  authorized  to  sign  checks,  and  to  file  with  it  the  form  of  signature  to  be  used  by  her. 

§  319.  Collateral  Security.  When  money  is  loaned,  the  lender  usually 
requires  the  borrower  to  give  some  evidence  aside  from  his  promise  that  he  will 
pay  the  money  at  the  time  specified.  This  evidence  is  usually  given  in  the  form 
of  security,  which  may  be  personal  or  collateral.  Personal  security  is  effected  by 
the  signature  of  the  one  who  wishes  to  guarantee  the  obligation.    Collateral  security 


450.00  nx-riNNATi  oHin  J«Jie    21 


CINCINNATI,  OHIO.. 


Thirty    days After  Date,    for  value  received,  the  undersigned  promise      lo  pay  to  the  order  of 

THE  FIFTH-THIRD  NATIONAL BANK.CINCINNATI.Q . 


Four  Hundred  Fifty  and  no/lGO 


at  The  Fifth-Third  National  Bank  of  Cincinnati,  in  current  funds,  with  interest  at  eight  per  cent,  after  maturity,  having  deposited  herewith  as  collateral  security  for 
the  payment  of  this  and  any  other  liability  or  liabilities  of  the  undersigned  to  the  holder  or  holders  hereof,  due  or  to  become  due,  or  which  may  hereafter  be  contracted 
or  existing,  the  following  property,  viz.: 


Five  shares  City  National  BanK  stock. 


Certificate  No.  88  -  Par  value,  $100.06 


The  markei  value  of  which  isS.  v.V.V.  J.V  V,.  with  further  right  in  the  holder  or  hoId^^^B  hereof  to  call  on  tho  undcrtiffned  for  additional  Bccurity  should  there  be  a  decline  in  eai 
to  respond,  this  obligatioo  shall  be  deemed  to  be  due  and  payable  at  once  without  demand  or  notice.  The  undervisned  hereby  give  to  the  holder  or  holders  hereof  a  lien  (or  1 
aforesaid  upon  all  ot  tho  property  or  securities  at  any  time  eivn  unto  or  left  in  or  coming  into  the  possession  of  said  Bank  by  the  undersifmed. 

The  underaigned  alflo  give  to  the  holder  or  holders  hereof  (uU  power  and  authority  to  sell  or  colleet  at  the  eipenae  of  the  undoraigned  all  or  any  part  or  portion  thereof,  at  any  plac*.  either  io  the  City  of 
Cincinnati.  Ohio,  or  elaewhere,  at  Public  or  Private  Sale,  at  ihe  opiion  of  said  holder  or  holders  on  the  non-performance  of  the  above  promise  and  at  any  time  thereafter,  and  «^thout  adTortiain*  the  same  or 
otherwise  giving  to  the  undersized  any  notice.     In  case  of  Pubho  Sale,  said  holder  or  holders  tnay  purchase  without  being  linble  to  account  for  more  than  the  net  proceeds  of  such  sale. 

Ills  further  agreed  that  the  provisions  of  this  note  shall  also  apply  to  any  new  or  additional  collateral;  that  if  the  undersigned  shall  become  insolvent  or  make  a  general  aasignment  for  thebeDefuof 
creditors,  or  Me  a  voluntary  petition  in  bankruptcy,  or  if  a  petition  in  bnakruptcy  shall  bo  filed  against  the  underaigned,  or  a  receiver  shall  be  appointed  of  the  property  or  assets,  or  any  thereof,  of  tba 
undersigned,  then  this  note'^shnll  forthwith  be  due  and  payable,  and  that  do  delay  oo  the  part  of  the  holder  or  holders  hereof  in  esercising  any  rights  hereunder  shall  operate  aa  a  waiver  of  said  rigbu. 

The  maker  and  endorser  severally  waive  preaentmeot,  demand  for  payment,  protest,  notice  of  protest,  and  not 


Watson  Bros .  &  Co . 


_  _  ...       505  Madison  Ave  .  ,^^  _  ^ 

p.  O  Address p^^    ^   2/^: 


(L-1) 


Illustration  No.  123,  Collateral  Note. 

EXPLANATION.  This  note  is  the  same  form  as  the  usual  promissory  note,  except  that 
space  is  provided  for  a  description  of  the  collateral  security.  The  security  attached  to  this  note  is 
five  shares  of  City  National  Bank  stock.  This  stock  is  not  shown  in  the  illustration,  since  the  student 
is  familiar  with  the  form  of  a  certificate  of  stock,  through  the  preceding  discussion. 


GENERAL  INFORMATION  299 

is  effected  by  placing  the  title  to  personal  or  real  property,  as  guaranty  for  the 
payment  of  the  obligation.  The  title  to  chattels  and  real  estate  is  placed  as  col- 
lateral security  by  the  use  of  a  written  document  referred  to  as  a  "mortgage." 
The  title  to  personal  property  other  than  chattels. is  placed  as  collateral  security 
by  the  use  of  a  collateral  note;  this  class  of  personal  property  usually  consists  of 
written  contracts  such  as  stocks  and  bonds.  Illustration  No.  123  shows  one  form 
of  collateral  note.  The  security  is  attached  to  the  note;  if  the  collateral  note  is 
not  paid  at  maturity,  the  holder  sells  the  collateral  and  deducts  from  the  proceeds 
of  the  sale,  the  amount  of  the  indebtedness  mentioned  in  the  note. 

§320.  A  Journal  Voucher  is  the  written  authority  for  an  entry  in  the  general 
journal  which  is  not  supported  by  a  business  paper  received  in  the  usual  course  of 
business.  Journal  vouchers  are  used  to  support  transfer  entries  and  entries  which 
affect  the  accounting  records  in  different  departments.  Each  journal  voucher  is 
sdgned  by  the  person  who  is  authorized  to  issue  it.  Illustration  No.  124  shows  one 
form  of  a  journal  voucher. 


The  J.  A.  Whitney  Company,  Inc. 

Journal  Voucher  No.jLL 
Journal  PAGE_i_  Datf  -^"^^  ^^y   1Q2 


DEBIT:     Delivery  Equipment 

500 

00 

CREDIT:  Unissued  Capital  Stock 

500 

00 

REMARKS:     Fi'i'^  shares  of  stock  (par  value  $100.00)  issued  in  payment  for  a  used  Reo  truck 
for  use  in  the  delivery  department. 

APPROVAL: 

J.  S.  Martin /.  A.   Whitney 


SECRETARY  PRESIDENT 


Illustration  No.  124,  Journal  Voucher. 

EXPLANATION.  This  journal  voucher  was  issued  by  the  president  of  the  corporation, 
and  authorizes  the  issue  of  five  shares  of  capital  stock  in  exchange  for  a  delivery  truck.  Without 
this  journal  voucher,  the  stockholders  of  the  corporation  might  question  the  correctness  of  the  entry. 

§  321.  An  Exhibit,  as  applied  to  accounting,  is  a  statement  of  material 
facts  with  reference  to  the  financial  condition  of  the  business,  presented  in  sum- 
marized form.  The  exhibits  submitted  to  the  board  of  directors  usually  consist  of 
the  Balance  Sheet,  Statement  of  Profit  and  Loss,  and  Analysis  of  the  Surplus 
account.  Exhibits  are  usually  designated  by  letter,  the  Balance  Sheet  being 
Exhibit  A,  Statement  of  Profit  and  Loss,  Exhibit  B,  and  Analysis  of  the  Surplus 
account.  Exhibit  C. 

Exhibits  should  be  brief  and  be  condensed  so  as  to  provide  a  comprehensive 
view  of  the  financial  condition  of  the  business.  Details  in  regard  to  the  facts  set 
forth  in  each  exhibit  are  given  in  schedules  or  analytical  statements  which  accom- 
pany it. 


300 


GENERAL  INFORMATION 


§  322.  A  Schedule  is  a  detailed  list  showing  the  items  which  compose  a 
total  on  the  Balance  Sheet  or  Statement  of  Profit  and  Loss,  as  a  list  of  notes  re- 
ceivable, accounts  receivable,  merchandise  in  stock,  etc.  Schedules  are  usually 
numbered,  and  the  number  indicated  on  the  Balance  Sheet  and  Statement  of  Profit 
and  Loss,  as  illustrated  in  Chapter  XXXII. 

§  323.  An  Analytical  Statement  is  a  detailed  analysis  of  the  balance  of 
an  account  on  the  Statement  of  Profit  and  Loss,  as  a  list  of  the  various  expenditures 
which  relate  to  the  selling  expenses,  buying  expenses,  administrative  expenses, 
etc.  Each  analytical  statement  is  usually  numbered,  and  the  number  indicated 
on  the  Statement  of  Profit  and  Loss.     . 

§  324.  Numbering  Accounts.  In  a  business  of  material  size,  many  ac- 
counts will  be  required  to  show  the  results  of  the  transactions  performed  in  the 
operations  of  the  business.  Reference  to  these  accounts  may  be  facilitated  by 
giving  each  account  a  number  according  to  its  classification.  The  use  of  numbers 
to  designate  accounts  can  best  be  understood  by  a  careful  study  of  Illustration 
No.  125,  in  which  the  arrangement  is  based  on  the  division  of  the  accounts  into 
three  groups:  (i)  property  accounts,  (2)  proprietorship  accounts,  and  (3)  revenue 
accounts. 


I.  PROPERTY  ACCOUNTS 

II.  Asset  Accounts 

III.  Current  Assets 
mi.     Cash 

1 1 12.  Notes  Receivable 

1 1 102.  Notes  Receivable  Discounted* 

1 1 13.  Accounts  Receivable 

1 1 103.  Reserve  for  Doubtful  Accounts 

1 1 14.  Merchandise  Inventory 

1 1 15.  Accrued  Interest  Earned 

112.  Fixed  Assets 

1 121.  Office  Equipment 

11201.  Reserve  for  Dep.  of  OfKice  Equipment 

1122.  Store  Fixtures 

1 1202.  Reserve  for  Dep.  of  Store  Fixtures 

1123.  Delivery  Equipment 

1 1203.  Reserve  for  Dep.  of  Delivery  Equip. 

1 124.  Building 

1 1204.  Reserve  for  Depreciation  of  Building 

1 125.  Land 

113.  Intangible  A  ssets 

1 131.  Goodwill 

1 132.  Patents 

114.  Deferred  Charges  to  Operation 

1 141.  Unexpired  Insurance 

1 142.  Prepaid  Advertising 

1 143.  Office  Supplies 

1 144.  Organization  Expense  • 

12.     Liability  Accounts 

121.  Current  Liabilities 

121 1.  Notes  Payable 

12 12.  Accounts  Payable 

1213.  Accrued  Interest  Cost 

12 14.  Accrued  Wages 

122.  Fixed  Liabilities 

1 22 1.  Mortgages  Payable 

1222.  Bonds  Payable 


2.  PROPRIETORSHIP  ACCOUNTS 

21.  Capital  Stock 

201.  Unissued  Capital  Stock 

202.  Treasury  Stock 

22.  Surplus 

23.  Reserve  for  Sinking  Fund 

3.  REVENUE  ACCOUNTS 
31.     Income  Accounts 

311.     Operating  Income 

3111. 

31101 

31102 

312. 

3121. 

3122. 


Sales 
.     Sales  Returns 
.     Sales  Allowances 
Non-operating  Income 
Interest  Earned 
Purchases  Discount 


32.     Expense  Accounts 

321.  Operating  Expense 

321 1.  Cost  of  Sales 

321 1 1.  Purchases 

321101.  Purchases  Returns 

32 1 102.  Purchases  Allowances 

32112.  Freight  In 

3212.  Buying  Expense 

3213.  Selling  Expense 

32131.  Advertising 

32132.  Warehouse  Expense 

32133.  Delivery  Expense 

32134.  Freight  Out 

32135.  Loss  on  Doubtful  Accounls 

32136.  Sundry  Selling  Expenses 

3214.  Administrative  Expense 

32 141.  Building  Expense 

32142.  Sundry  Administrative  Expenses 

322.  Non-operating  Expense 

3221.  Interest  Cost 

3222.  Sales  Discount 


"Zero  preceding  last  digit  indicates  its  opposite  tendency. 

Illustration  No.  125,  Numbering  Accounts, 


GENERAL  INFORMATION  301 

§  325.  Depreciation.  Depreciation  refers  to  the  decrease  in  the  value  of 
fixed  assets  due  to  their  use  in  the  operations  of  the  business  and  to  the  lapse  of 
time  (§  127).  Depreciation  is  not  applicable  to  those  assets  which  will  be  consumed 
in  a  short  time,  such  as  office  supplies,  advertising  material,  shipping  room  material, 
etc. ;  it  is  applicable  only  to  fixed  assets  purchased  for  use  in  the  business,  which 
will  decrease  in  value  because  of  their  use  but  which  usually  have  some  value  no 
matter  how  long  they  may  be  used.  It  is  necessary  to  record  this  decrease  in 
value  because  it  is  one  of  the  operating  costs  of  the  business.  If  not  recorded  from 
year  to  year,  the  Balance  Sheet  and  Statement  of  Profit  and  Loss  prepared  at  the 
end  of  each  year  will  not  show  the  true  facts. 

There  are  several  methods  for  calculating  depreciation,  but  the  two  most 
generally  used  are  the  "straight  line"  method  and  the  "declining  balance"  method. 
With  the  straight  line  method,  the  asset  is  given  a  scrap  value  at  the  expiration 
of  a  designated  number  of  years,  and  it  is  depreciated  in  equal  amounts  for  each 
of  these  years  between  the  time  of  purchase  and  the  time  it  is  to  be  scrapped.  Thus 
if  it  is  assumed  that  a  typewriter  which  costs  $100.00  will  have  a  scrap  (exchange) 
value  of  $25.00  at  the  end  of  five  years,  the  depreciation  for  each  year  is  $15.00; 
$100.00  cost,  minus  $25.00  exchange  value,  equals  $75.00  depreciation;  $75.00 
divided  by  5,  the  number  of  years,  equals  $15.00,  depreciation  each  year;  $15.00 
depreciation  on  an  investment  of  $100.00  is  equivalent  to  a  depreciation  of  15%. 

With  the  declining  balance  method,  the  depreciation  is  calculated  on  the  value 
of  the  fixed  asset  at  the  end  of  each  year.  If  it  is  assumed  that  the  typewriter 
which  cost  $100.00  will  be  of  service  for  five  years,  the  depreciation  for  the  first 
year  would  be  ^  of  $100.00,  or  $20.00;  the  depreciation  for  the  second  year  would 
be  I  of  $80.00,  or  $16.00;  the  depreciation  for  the  third  year  would  be  ^  of  $64.00, 
or  $12.80,  the  depreciation  for  the  fourth  year  would  be  i  of  $51.20,  or  $10.24;  the 
depreciation  for  the  fifth  year  would  be  i  of  $40.96,  or  $8.19;  the  scrap  value  at  the 
end  of  five  years  being  $32.77. 

Depreciation  should  be  shown  on  the  Balance  Sheet  and  on  the  Statement  of 
Profit  and  Loss.  It  is  shown  on  the  Balance  Sheet  as  a  deduction  from  the  cost 
value  of  the  assets;  it  is  shown  on  the  Statement  of  Profit  and  Loss  through  the 
increase  in  the  operating  expense  accounts  affected  by  the  use  of  the  fixed  assets. 
The  depreciation  shown  on  the  Balance  Sheet  and'  Statement  of  Profit  and  Loss 
is  the  result  of  its  being  recorded  in  the  general  journal  and  posted  to  the  accounts 
in  the  ledger. 

It  is  not  practical  to  show  the  exact  amount  of  the  depreciation  on  each  fixed 
asset  no  matter  which  method  may  be  used.  The  reason  for  this  is  that  it  is  not 
within  the  human  mind  to  fix  an  exact  future  value  on  property  which  is  to  be 
used  in  the  business,  and  to  determine  in  advance  the  amount  of  the  depreciation 
that  will  occur  from  year  to  year  through  the  use  of  the  property.  The  purpose 
of  recording  depreciation  is  to  take  out  of  the  profit  of  each  year  the  estimated 
decrease  in  the  value  of  the  fixed  assets  through  their  use  in  the  operations  of  the 
business.  The  facts  gained  for  recording  depreciation  are  based  on  estimation 
only.  While  they  may  not  be  exact,  yet  they  will  enable  the  management  to  know 
the  approximate  value  of  fixed  assets,  in  case  this  information  is  needed  in  the 
adjustment  of  fire  loss.  It  also  makes  possible  the  distribution  of  losses  which  are 
constantly  occurring  but  the  amount  of  which  will  not  be  known  until  it  is  necessary 
to  replace  the  fixed  assets. 

§  326.  Turnover  refers  to  the  number  of  times  the  capital  invested  in  a 
given  class  of  merchandise  will  be  reinvested  in  the  same  class  of  goods  because 
of  sales  in  excess  of  original  inventory  value.  The  butcher  will  turn  over  the  fresh 
meat  which  he  buys  and  sells  more  rapidly  than  the  piano  merchant  will  turn 
over  the  pianos  which  he  buys  and  sells.  A  turnover  of  ten  times  applicable  to  a 
certain  class  of  merchandise,  means  that  the  merchant  buys  and  sells  this  class 
of  merchandise   ten   times  each   year. 


302  EXERCISES 

The  method  of  determining  turnover  is  explained  and  illustrated  in  Commercial 
Arithmetic,  hence  it  is  not  necessary  to  discuss  it  in  detail  here.  The  method 
most  popular  with  merchants  is  to  divide  the  cost  of  the  goods  sold  during  the 
year  by  the  average  inventory  (at  cost)  fOr  the  year.  Applying  this  rule  to  the 
Statement  of  Profit  and  Loss  in  Illustration  No.  131,  the  turnover  would  be  3.25; 
this  is  arrived  at  as  follows:  beginning  inventory,  $14,606.05;  closing  inventory, 
$31,261.78;  cost  of  goods  sold,  $74,626.50.  $14, 6o6.05+$3i, 261. 78  =  $45,867.83. 
$45,867.83-^-2  =$22,933,915,  average  inventory  at  cost  for  year.  $74,626. 50-T- 
$22,933,915=3.25,  turnover. 


Exercise  No.  100,  Trade  Acceptance 

May  19  the  Fillmore  Music  Company  of  Denver,  Colorado,  placed  an  order 
with  the  John  Church  Company  of  Cincinnati,  Ohio,  for  five  hundred  songbooks 
No.  387.  May  25  these  books  were  shipped  by  express  and  billed. at  62c  per  copy; 
terms,  3%  trade  acceptance  at  sixty  days.  May  28  the  Fillmore  Music  Company 
received  the  invoice  and  entered  it  in  its  purchases  journal,  holding  the  trade  ac- 
ceptance until  the  merchandise  was  delivered.  May  31  the  music  books  were 
received,  and  the  trade  acceptance  accepted  and  mailed  to  the  John  Church  Com- 
pany. June  3  the  John  Church  Company  received  the  trade  acceptance  and 
instructed  the  bookkeeper  to  record  it. 

Record  in  journal  form  the  entry  made  by  the  John  Church  Company  when 
the  order  was  filled,  the  entry  made  by  the  Fillmore  Music  Company  when  the 
invoice  was  received,  the  entry  made  by  the  Fillmore  Music  Company  when  the 
trade  acceptance  was  accepted,  and  the  entry  made  by  the  John  Church  Company 
when  the  trade  acceptance  was  received,  assuming  that  each  concern  keeps  accounts 
with  Trade  Acceptances  Receivable  and  Trade  Acceptances  Payable. 

Exercise  No.  101,  Journal  Vouchers 

The  following  transactions  were  recorded  by  the  bookkeeper  for  the  R.  H. 
Donnelly  Corporation  and  supported  by  journal  vouchers: 

Oct.  27.  Mays  Bros.  &  Minot,  a  customer,  report  merchandise  received  in  bad 
condition,  and  the  salesman  in  their  territory  requests  that  they  be 
allowed  credit  for  $62.50. 

30.  At  the  close  of  the  fiscal  period,  the  sales  manager  requests  that  $216.50 
debited  to  the  Delivery  Expense  account,  which  shows  a  sales  cost, 
be  debited  to  the  Freight  In  account  because  this  amount  applies 
to  the  cost  of  hauling  merchandise  purchased  from  the  station  to  the 
warehouse  by  the  delivery  equipment. 

Nov.  9.  The  attorney  for  the  corporation  reports  that  the  account  with  Jeffries 
&  Son,  which  is  long  past  due,  is  uncollectible,  and  the  credit  manager 
instructs  that  its  balance,  $61.85,  be  closed  into  the  Reserve  for 
Uncollectible  Accounts  account. 

18.  The  president  authorizes  the  sale  of  ten  shares  of  common  stock  (par 
value,  $100.00)  to  Y.  S.  Undenv'ood  at  $95.00  per  share  and  the 
acceptance  in  payment  of  this  his  sixty-day  note  for  this  amount, 
dated  today,  with  interest  at  6%  from  date. 

Make  each  of  the  above  entries  in  journal  form  and  prepare  the  journal  voucher 
(Illustration  No.  124)  which  would  support  it;  select  your  own  names  for  the  officers 
authorizing  the  issue  of  the  journal  vouchers  and  indicate  the  title  of  each. 


QUESTIONS 


303 


Jan.     2,  1919 
Dec.  31,  1919 


Nov. 
Dec. 


6,  1920 
31,  1920 


Exercise  No.  102,  Depreciation 

Make,  in  journal  form,  the  entries  for  the  following  transactions  relating  to 
a  Packard  truck  purchased  by  the  Haggard  Drug  Company;  post  the  entries 
affecting  the   Delivery  Equipment  and   Reserve  accounts. 

Purchased  for  $3,500.00  cash  a  Packard  truck  to  be  used  in  deliv- 
ering merchandise. 

Recorded  an  estimated  depreciation  on  the  truck  of  123^2%  of 
cost. 

Paid  $60.00  for  a  new  tire  to  replace  a  worn  tire  on  the  truck. 

Recorded  an  estimated  depreciation  on  the  truck  of  12}^%  of 
cost. 

Paid  $197.60  for  storage  and  repairs  on  truck. 

Recorded  an  estimated  depreciation  on  the  truck  of  12}/^%  of 
cost. 

The  truck  was  badly  damaged  in  a  collision  with  a  street  car. 
Brought  suit  against  the  street  car  company  for  $1,500.00 
damages. 

Paid  $1,054.65  for  repairs  on  the  damaged  truck. 

Debit  Loss  on  Damaged  Truck. 

Collected  $1,000.00  damages  from  the  street  car  company;  the 
street  car  company  paid  the  costs  of  the  suit. 

Dec.  31,  1922.  Recorded  an  estimated  depreciation  on  the  truck  of  123^%  of 
cost. 

Feb.  I,  1923.  Gave  the  old  truck  and  our  check  for  $2,750.00  in  full  payment 
for  a  new  truck,  cost  price  $3,750.00. 

Debit  Adjustment  of  Errors  in  Previous  Periods  account  for  the  difference  between  the  re- 
serve for  depreciation  and  the  amount  allowed  on  the  old  truck.  This  account  is  debited  because, 
if  the  reserve  for  depreciation  set  up  during  the  four  previous  years  had  been  sufficient,  the  profit 
for  each  of  these  years  would  have  been  correspondingly  less,  hence  the  Surplus  account  (§  271,  1[  3), 
which  shows  the  accumulated  profits,  would  have  been  less. 


April  13,  1921 
Dec.  31,  1921 

Mar.  17,  1922 


May    8,  1922. 
July     7,  1922. 


10. 


'    QUESTIONS 

(a)  What  are  the  advantages  of  a  trade  acceptance?    (b)  the  disadvantages? 
Can   you   explain   by  example  the   three   classes  of   security   usually    given 

as  guarantee  for  the  payment  of  obligations? 
When  merchandise  is  sold  on  account,  what  guarantee  does  the  merchant 

have  that  he  will  collect  the  amount  of  the  sale  when  it  is  due? 
(a)  When  should  a  bookkeeper  require  a  power  of  attorney?     (b)  When  is  a 

power  of  attorney  not  essential  to  the  work  of  a  bookkeeper? 
(a)  What  is  the  purpose  of  a   journal  voucher?     (b)  Why  should  a  journal 

voucher  be  filed? 
(a)  What  is  the  connection  between  an  exhibit,  a  schedule,  and  an  analytical 

statement?      (b)  How  is  each  used  in  connection  with  the  preparation  of 

reports? 
What  is  the  advantage  of  numbering  accounts,  and  using  numbers  in  addition 

to  the  titles  of  the  accounts? 
What  is  depreciation? 
What  is  the  difference  between  the  straight  line  and   the  declining  balance 

method  of  determining  the  amount  of  the  depreciation? 
What  is  turnover? 


Chapter  XXXII 

WORKING  SHEET,  ADJUSTING  ENTRIES  AND  REPORTS 

The  Purpose  of  this  Chapter  is  to  explain  by  means  of  illustrations  the 
work  required  of  the  bookkeeper  or  accountant  at  the  close  of  a  fiscal  period.  The 
illustrations  provide  a  model  set  with  the  books  of  original  entry  and  accounts 
omitted.  The  illustrations  are  prepared  from  the  general  ledger  of  a  business 
owned  and  operated  by  a  corporation,  but  are  applicable  to  a  business  owned  and 
operated  by  an  individual  or  by  partners,  the  only  exception  being  the  method 
of  showing  the  proprietorship. 

§  327.  The  Working  Sheet  is  a  ruled  form  used  by  the  bookkeeper  or 
accountant  in  the  preparation  of  the  Balance  Sheet  and  Statement  of  Profit  and 
Loss.  It  contains  space  ruled  for  the  names  of  the  accounts  in  the  ledger,  and 
eight  or  more  amount  columns  for  the  Trial  Balance,  adjustments.  Balance  Sheet, 
and  Statement  of  Profit  and  Loss.  The  purpose  of  the  Working  Sheet  is  to  ascertain 
the  net  profit  before  preparing  the  Balance  Sheet  and  Statement  of  Profit  and 
Loss.  The  Working  Sheet  is  prepared  from  the  Trial  Balance  taken  at  the  end  of 
the  fiscal  period  and  the  entries  for  the  inventories,  accruals,  and  reserves. 

The  Working  Sheet  and  its  use  in  connection  with  the  work  required  at  the 
close  of  a  fiscal  period  are  best  explained  by  illustrations.  The  illustrations  which 
follow  consist  of  (a)  the  Trial  Balance  taken  at  the  close  of  the  fiscal  period,  (b) 
a  list  of  inventories,  accruals,  and  reserves,  (c)  the  adjusting  entries  for  these  in 
journal  form,  (d)  the  Working  Sheet,  (e)  the  Balance  Sheet,  (f)  the  Statement  of 
Profit  and  Loss,  (g)  the  closing  entries  in  two  forms,  (h)  the  post-closing  entries, 
and  (i)  the  post-closing  Trial  Balance. 

§  328.  Preparation  of  the  Working  Sheet.  The  Working  Sheet  is  com- 
pleted by  (a)  copying  the  Trial  Balance  in  the  first  two  columns,  (b)  posting  the 
adjusting  entries  from  the  journal  to  the  adjustment  columns  on  a  line  with  the 
accounts  alTected,  (c)  extending  the  balances  on  the  Trial  Balance  and  the  amounts 
in  the  adjustment  columns  into  the  asset,  liability,  cost,  and  income  columns,  and 
(d)  proving  the  results.  If  all  the  merchandise  purchased  had  been  sold  and  there 
were  no  accruals  or  reserves,  the  Working  Sheet  would  be  prepared  by  extending 
the  balances  on  the  Trial  Balance  into  the  proper  columns  at  the  right;  inven- 
tories, accruals  and  reserves  affect  the  accounts  on  the  Trial  Balance  according 
to  their  nature,  and  such  items  must  be  considered  when  extending  the  balances. 

§  329.  Copying  the  Trial  Balance.  The  Working  Sheet  should  be  provided 
with  a  sufficient  number  of  horizontal  lines  for  all  the  accounts  in  the  general  ledger 
and  additional  lines  for  new  accounts  made  necessary  through  posting  the  adjusting 
entries.  After  the  Trial  Balance  has  been  copied  in  the  first  two  columns  at  the 
left,  the  results  should  be  audited  and  both  columns  added  to  detect  errors  in 
copying. 

304 


TRIAL  BALANCE  AT  CLOSE  OF  PERIOD 


305 


J.  A.  WHITNTY  &  CO. 
TRIAL  BALANCE.  DECEMBER  31.  192 


T 

Merchants  National  Bank 

10496 

30 

2 

Petty  Cash 

50 

00 

3 

Notes  Receivable 

3338 

99 

4 

Notes  Heceivable  Discounted 

350 

CO 

5 

Accounts  Receivable 

10997 

99 

6 

Reserve  for  Doubtful  Accounts  Receivable 

112 

86 

7 

Subscribers  to  Capital  Stock 

750 

00 

g 

Cherry  Street  Property 

2250 

00 

9 

Office  Equipment 

500 

00 

10 

Reserve  for  Depreciation  of  Office  Equip. 

27 

25 

11 

Store  Fixtures 

350 

00 

12 

Reserve  for  Depreciation  of  Store  Fixtures 

17 

75 

13 

Delivery  Equipment 

2018 

00 

14 

Reserve  for  Denreciation  of  Delivery  Equip. 

lie 

72 

15 

Building 

3000 

00 

16 

Reserve  for  Depreciation  of  Building 

300 

00 

17 

Land 

1500 

00 

18 

Goodwill 

5063 

43 

19 

Office  Supplies 

246 

28 

20 

Advertising  Material 

610 

05 

21 

Warehouse  Material 

523 

16 

22 

Insurance 

219 

Co 

23 

Notes  Payable 

6014 

28 

24 

Accounts  Payable 

19953 

02 

25 

Capital  Stock 

50000 

00 

26 

Unissued  Capital  Stock 

10000 

00 

27 

Subscriptions  to  Capital  Stock 

1000 

00 

28 

Treasury  Stock 

500 

00 

29 

Surplus 

6805 

86 

30 

Sales 

108961 

52 

31 

Sales  Returns 

301 

21 

32 

Salos  Allowances 

120 

11 

33 

1922  Inventory 

14506 

05 

34 

Purchases 

85837 

52 

35 

Freight  In 

5614 

03 

36 

Purchases  Returns  and  Allowances 

169 

32 

37 

Branch  Store 

10920 

79 

3373 

52 

38 

Selling  Expense 

3887 

13 

39 

Salaries  in  Selling  Department 

5567 

39 

40 

Advertising  Expense 

3292 

56 

41 

Traveling  Expense 

7480 

6b 

42 

Warehouse  Expense 

2393 

45 

43 

Delivery  Expense 

2152 

40 

44 

Freight  Out 

43 

85 

45 

Administrative  Expense 

2143 

15 

46 

Building  Expense 

1075 

00 

47 

Interest  Earned 

So 

80 

48 

Purchases  Discount 

568 

09 

49 

Cherry  Street  Property  Revenue 

197 

50 

50 

Profit  on  Sale  of  Stock 

85 

00 

51 

Interest  Cost 

138 

48 

52 

Sales  Discount 

166 

47 

198154 

49 

198154 

49 

Illustration  No.  126,  Trial  Balance  at  Close  of  Fiscal  Period. 

EXPLANATION.  This  Trial  Balance  was  prepared  from  the  ledger  of  J.  A.  Whitney  & 
Co.,  an  incorporated  concern,  at  the  close  of  a  business  year.  The  account  with  Cherry  St.  Property 
shows  the  value  of  real  estate  purchased  from  a  customer  to  effect  the  settlement  of  his  account 
without  legal  proceedings;  it  is  carried  on  the  ledger  of  the  corporation  as  an  asset  to  be  sold,  and 
not  as  one  to  be  used  in  the  business. 


3o6 


LIST  OF  ADJUSTMENTS 


§  330.  Entries  in  the  Adjustment  Columns.  The  adjustment  columns 
are  provided  because  each  inventory,  accrual  or  reserve  affects  two  accounts,  one 
or  both  of  which  may  be  in  the  ledger.  The  journal  entries  for  these  inventories, 
accruals,  and  reserves  are  posted  to  the  adjustment  columns  on  the  Working  Sheet 
in  the  same  manner  as  they  will  be  posted  to  the  accounts  in  the  ledger  after  the 
net  profit  for  the  period  has  been  ascertained  through  the  Working  Sheet. 

The  posting  of  the  entries  in  Illustration  No.  128  to  the  adjustment  columns 
of  the  Working  Sheet  in  Illustration  No.  129  can  best  be  understood  by  comparing 
the  two  illustrations  and  tracing  the  posting.  The  first  journal  entry  is  to  record 
the  merchandise  inventory  at  the  close  of  the  period.  This  is  posted  to  the  credit 
adjustment  column  on  a  line  with  Purchases,  and  to  the  debit  adjustment  column 
on  a  line  with  1923  Inventory.  (The  year  "1923"  is  used  to  distinguish  the  new 
inventory  from  the  old  inventory  which  is  designated  as  "1922.")  The  second 
entry  is  to  record  the  branch  store  inventory,  and  is  posted  in  the  same  manner 
except  that  the  amounts  are  entered  in  the  debit  and  credit  adjustment  columns  on 
a  line  with  the  accounts  affected.  It  will  be  observed  that  in  both  cases  new 
accounts  are  necessary  for  the  debit  entries  because  the  purpose  of  each  entry  is 
to  record  an  asset  which  does  not  appear  in  the  ledger.  The  other  entries  are 
posted  in  the  same  manner;  the  numbers  at  the  left  in  Illustration  No.  128 
indicate  the  lines  on  the  Working  Sheet  on  which  the  amounts  are  entered. 

When  more  than  one  entry  affects  the  debit  or  credit  of  an  account  on  the  Trial  Balance,  it 
is  necessary  to  interline  the  amounts  in  the  adjustment  columns  as  in  the  illustration. 


J'.    A.   WHITNEY  S:    CO. 
IKVENTORIES.    ACCRUALS  AND  RESERVES,    DECSIffiSR   31,    192 


Merchaniise  Inventory,  Deceniber  31,  1923 

31261 

78 

Branch  Store  Inventory,  Decemtier  31.  1923 

9127 

55 

Accruals: 

Interest  on  notes  and  accounts  receivable 

14 

93 

December  rent  on  Cherry  Street  property 

27 

50 

42 

43 

Interest  on  notes  payable 

69 

45 

December  rent  on  warehouse 

150 

00 

Branch  Store  payroll  for  five  days 

135 

42 

Expenses  of  traveling  salesman  to  the  31st 

87 

65 

Sarage  service  for  December 

122 

50 

Taxes  on  Cherry  Street  property 

67 

50 

532 

52 

Deferred  Charges  to  Operation: 

Office  supplies  on  hand 

82 

65 

Advertising  material  on  hand 

119 

65 

Warehouse  material  on  hand 

63 

75 

266 

05 

Insurance  Unexpired: 

Total  p:t;emiums  paid 

219 

05 

Ext)  irat  ions: 

'Office  Equipment               4.05 

Store  Fixtures                 3.12 

Delivery  Equipment          '   17.33 

Merchandise                   60.36 

Building                     24.38 

Cherry  Street  Property        18.56 

127 

80 

91 

25 

Reserves: 

Office  Equicment.  Z% 

15 

00 

Store  Fixtures.  3?^ 

10 

50 

Delivery  Equipment,  4^^ 

80 

72 

Building.  5^ 

150 

00 

256 

22 

Doubtful  Accounts  Receivable: 

One  tenth  of  Vfo   of  ITet  Sales 

108 

56 

Illustration  No.  127,  Inventories,  Accruals  and  Reserves. 

EXPLANATION.  The  value  of  the  merchandise  on  hand  at  the  main  store  and  the  value 
of  the  assets  on  hand  at  the  branch  store  are  each  ascertained  by  a  physical  inventory.  The  amount 
of  each  accrual,  deferred  charge  and  reserve  is  ascertained  by  the  bookkeeper  from  his  records 


ADJUSTING  ENTRIES 


307 


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Illustration  No.  128,  Adjusting  Entries  (Continued). 


^3o8 


EXTENSIONS  ON  WORKING  SHEET 


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Illustration  No.  128,  Adjusting  Entries  (Concluded). 

EXPLANATION.  These  entries  were  prepared  from  the  Hst  of  inventories,  accruals  and 
reserves  in  Illustration  No.  127.  The  year  is  given  in  connection  with  the  two  inventories  to  dis- 
tinguish these  from  the  1922  inventories  which  are  recorded  in  the  ledger.  The  Cherry  St.  Property 
Revenue  account  is  credited  for  the  rent  which  has  not  yet  been  collected,  because  this  account 
shows  the  income  from  the  property;  this  account  is  debited  with  the  accrued  taxes  because  the 
cost  of  these  taxes  reduces  the  income  from  rent.  The  entries  to  record  the  deferred  charges,  which 
include  materials  in  stock  and  unexpired  insurance,  transfer  the  cost  of  materials  used  and  insurance 
expired  to  the  proper  operating  accounts  so  that  the  balance  of  each  account  which  is  to  show  a 
deferred  charge  will  be  the  value  of  the  asset. 

§  331.  Extensions  on  the  Working  Sheet.  Each  account  on  the  Trial 
Balance  shows  an  asset,  a  liability,  a  cost  or  an  income,  hence  the  balance  will 
be  extended  in  one  of  the  four  columns  at  the  right  of  the  adjustment  columns. 
A  careful  study  of  the  extensions  on  the  Working  Sheet,  Illustration  No.  129,  will 
show  the  method  of  arriving  at  the  amount  to  be  entered  in  the  asset,  liability, 
cost  or  income  columns.  It  will  be  observed  that  each  amount  in  the  debit  adjust- 
ment column  is  added  to  the  debit  side  of  the  account  it  affects,  and  each  amount 
in  the  credit  column  is  added  to  the  credit  side  of  the  account  it  affects. 

§  332.  Results  of  the  Extensions.  After  all  the  adjusted  balances  have 
been  extended  into  the  four  columns  at  the  right,  all  the  columns  on  the  Working 
Sheet  including  the  Trial  Balance  are  added,  and  the  totals  entered  in  small  pencil 
figures  as  in  Illustration  No.  129.  The  totals  of  the  debit  and  credit  columns  on 
the  Trial  Balance  will  be  equal  because  equal  debits  and  credits  have  been  recorded 
in  the  ledger,  and  a  Trial  Balance  is  a  list  of  the  open  accounts  in  the  ledger.  The 
totals  of  the  debit  and  credit  adjustment  columns  will  be  equal  because  these  two 

{Concluded  on  page,  j  10) 


WORKING  SHEET 


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Illustration  No.  129,  Working  Sheet  (Continued). 


310 


PURPOSE  OF  WORKING  SHEET 


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Illustration  No.  129,  Working  Sheet  (Concluded). 

EXPLANATION.  This  Working  Sheet  was  prepared  from  the  Trial  Balance,  Illustration 
No.  126,  and  the  adjusting  entries,  Illustration  No.  128.  The  student  should  check  each  amount 
in  the  Adjustments  columns  with  the  journal  entries  in  the  illustration  in  the  same  manner  as  check- 
ing the  posting  from  a  book  of  original  entry  to  the  ledger.  When  this  is  completed,  he  should 
check  the  extensions  in  the  Balance  Sheet  and  Profit  and  Loss  columns.  Where  two  or  more 
amounts  are  entered  opposite  the  name  of  an  account,  the  total  of  these  amounts  is  used  in  making 
the  extension.  Pencil  check  marks  should  be  placed  at  the  right  of  each  amount  on  the  Working 
Sheet  as  the  check.ing  is  completed,  in  order  that  the  student  may  know  that  he  has  completed 
all  the  work  required  in  connection  with  the  preparation  of  the  Working  Sheet.  The  years  "1922" 
and  "1923"  are  used  to  distinguish  between  the  "old"  and  "new"  inventories  (§  330). 

{Continued  from  page  308) 
columns  are  the  result  of  posting  journal  entries  in  which  debits  and  credits  are 
equal.  The  totals  of  the  asset  and  liability  columns  will  not  be  equal  unless  the 
business  has  been  operated  without  a  profit  or  loss.  The  difference  between  the 
total  of  the  asset  column  and  the  total  of  the  liability  column  (with  the  capital 
accounts  as  liabilities)  will  be  the  net  profit  or  net  loss;  if  the  assets  are  greater 
than  the  liabilities,  the  business  has  been  operated  at  a  profit,  and  if  the  liabilities 
are  greater  than  the  assets,  the  business  has  been  operated  at  a  loss.  The  totals 
of  the  cost  and  income  columns  will  not  be  equal  unless  the  business  has  been 
operated  without  a  profit  or  a  loss;  if  the  total  of  the  cost  column  is  the  greater, 
the  business  has  been  operated  at  a  loss,  and  if  the  total  of  the  income  column 
is  the  greater,  it  has  been  operated  at  a  profit.  The  difference  between  the  total 
of  the  asset  column  and  the  total  of  the  liability  column  will  be  the  same  as  the 
difference  between  the  total  of  the  cost  column  and  the  total  of  the  income  column 
because  the  net  assets  will  have  increased  the  same  amount  as  the  net  profit,  or 
the  net  assets  will  have  decreased  the  same  amount  as  the"  net  loss. 

The  purpose  of  the  Working  Sheet  is  to  ascertain  the  net  profit  or  net  loss 
resulting  from  operating  the  business  during  a  fiscal  period;  this  purpose  is  ac- 
complished when  the  difference  between  the  assets  and  liabilities  is  the  same  as 
the  difference  between  the  cost  and  income.  When  the  results  do  not  prove,  it  is 
necessary  to  audit  the  work  to  ascertain  the  error  or  errors.  It  is  necessary  for  the 
one  making  the  extensions  to  distinguish  between  an  asset  and  a  cost,  and  a  lia- 
bility and  an  income,  because  an  error  resulting  from  a  liability  extended  as  an 
income,  or  a  cost  extended  as  an  asset  will  not  be  detected  through  a  comparison 
of  the  net  profit  shown  by  the  difference  between  the  assets  and  liabilities,  and 
the  difference  between  the  cost  and  income. 


BALANCE  SHEET 


311 


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312 


STATEMENT  OF  PROFIT  AND  LOSS 

Exhibit   B 
J.    A..   T.'HITNEY   &   CO. 
STATSlffiNT   OP  PROFIT  AND  LOSS   FOH   PERIOD  ENDING    DECEIffiER    31.    192 


Returns  from  Sales: 

Gross  Sales 
Deduct  Sales  Returns 
"   Sales  Allowances 

Net  returns  from  merchandise  sold 

Cost  of  Merchandise  Sold: 


192£  Inventory 
Add  Purchases 
"  Preie-ht  In  

Deduct  Purchases  Ret\irn3  and  Allowances 

Net  cost  of  merchandise  purchased 
Deduct  1923  Inventory 

Net  cost  of  merchandise  sold 

Gross  Profit  on  Sales 

Branch  Store: 

Net  Profit  per  Schedule  5 

Gross  Profit  from  Operations 


Operating  Expenses: 

Selling  Expenses: 
Selling  Expense 

Salaries  in  Selling  Department 
Advertising  Expense 
Traveling  Expense 
Warehouse  Expense 
Delivery  Expense 
Freight  Out 
Loss  on  Doubtful  Accou-Tits  Rec . 

Administrative  Expenses: 
Administrative  Expense 
Building  Expense 

Total  Operating  Expenses 

Net  Profit  from  Operations 

Other  Income: 

Interest  Earned 

Purchases  Discount 

Cherry  Street  Property  Revenue 

Profit  on  S^le  of  Stock 

Total  Other  Income 

Gross  Income 

Deductions    from   Income: 

Interest   Cost 
Sales   Discount 

Total   Deductions   from   Income 

Net    Income   Carried   to   Surplus 


14606.05 

85837.52 

5614.03 


3961.11 
5567.39 
3783.96 
7568.30 
3002.86 
2372.95 
43,85 
108.56 


2325.83 
1249.38 


301 
120 


106057 
169 


105888 
31261 


26408 


3575 


101 

568 

138 

85 


207 

166 


21 


108981 
421 


108560 


■74  626 


33933 


1444 


35578 


29994 


:394 


893 


6288 


374 


?13 


52 
32 


20 


50 


70 


96 


66 


19 


47 


76 


23 


40 


83 


Illustration  No.  131,  Statement  of  Profit  and  Loss  for  a  Corporation. 
EXPLANATION.     This  Statement  of  Profit  and  Loss  was  prepared  from  the  cost  and  in- 
come columns  on  the  Working  Sheet,  Illustration  No.  129. 


CLOSING  ENTRIES 


313 


CLOSING  ENTRIES 

The  closing  entries  are  prepared  from  the  Statement  of  Profit  and  Loss.  The 
purpose  is  to  close  all  cost  and  income  accounts  and  to  transfer  the  net  profit  or 
loss  to  the  Surplus  account.  These  entries  may  be  made  in  one  of  two  forms. 
With  one  form,  the  profit  on  sales  is  closed  into  the  Profit  and  Loss  account 
through  the  Sales  account  and  with  the  other,  the  costs  afifecting  the  sales  and 
the  returns  from  sales  are  closed  into  one  division  of  the  Profit  and  Loss  account 


a/y^Jt^lU'-yyt--0~CAy 


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Illustration  No.  132,  Closing  Entries  with  Profit  on  Sales  Closed  Through 
the  Sales  Account  (Continued). 

These  entries  were  prepared  from  the  Statement  of  Profit  and  Loss  in  Illustration  No.  131. 
The  method  of  closing  is  the  same  as  that  explained  in  preceding  chapters.  The  gross  profit  on 
sales  is  closed  into  the  Profit  and  Loss  account  through  the  Sales  account.  When  these  entries  are 
posted,  the  accounts  which  appear  on  the  Statement  of  Profit  and  Loss  will  be  in  balance. 


314 


CLOSING  ENTRIES 


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Illustration  No.   132,  Closing  Entries  with  Profit  on  Sales  Closed  Through  the 

Sales  Account  (Concluded). 

and  the  operating  and  non-operating  costs  and  non-operating  income  are  closed 
into  another  division  of  this  account.  Illustration  No.  132,  on  pages  313  and  314 
shows  the  entries  necessary  to  close  all  cost  and  income  accounts  through  one 
division  of  the  Profit  and  Loss  account;  these  entries  are  the  same  as  those  dis- 
cussed in  preceding  chapters.  Illustration  No.  133  shows  the  Profit  and  Loss 
account  resulting  from  posting  these  entries.  Illustration  No.  134  shows  the 
necessary  post-closing  entries.  Illustration  No.  135,  on  pages  316  and  317,  shows 
the  form  of  entries  when  two  divisions  of  the  Profit  and  Loss  account  are  to  be 
used,  and  Illustration  No.  136  shows  the  Profit  and  Loss  account  with  the  two 
divisions  resulting  from  posting  these  entries.  A  comparison  of  the  two  methods 
will  show  that  the  final  results  are  the  same.    However,  the  Profit  and  Loss  account 


POST-CLOSING  ENTRIES 


315 


with  the  two  divisions  shows  information  which  cannot  be  obtained  readily  from 
the  account  when  only  one  division  is  used.  Thus  if  a  comparison  between  sales 
and  returned  sales,  sales  allowances,  purchases,  or  freight  cost  is  desired,  the 
information  can  be  obtained  from  the  Profit  and  Loss  account  with  the  two  divi- 
sions without  referring  to  the  various  ledger  accounts. 


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Illustration  No.  133,  Profit  and  Loss  Account. 

EXPLANATION.     This  account  shows  the  Profit  and  Loss  account  after  the  entries  in 
Illustration  No.  132  have  been  posted. 


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Illustration  No.  134,  Post-closing  Entries. 
EXPLANATION.     The  purpose  of  these  entries  is  to  close  the  1923  Branch  Store  Inventory 
account  and  those  accounts  with  accruals  which  will  not  be  canceled  by  payment  at  an  early  date. 


3i6 


CLOSING  ENTRIES 


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Illustration  No.  135,  Closing  Entries  Through  Division  of  the  Profit  and 
Loss  Account  (Continued). 


PROFIT  AND  LOSS  ACCOUNT 


317 


C^fi'jiJ 


20, 
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3fj 


Illustration  No.  135,  Closing  Entries  Through  Division  of  the  Profit  and 
Loss  Account  (Concluded). 

EXPLANATION.     These  entries  were   prepared   from  the   Statement   of   Profit   and   Loss, 
Illustration  No.  131;    compare  with  Illustrations  Nos.  132,  133  and  136. 


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Illustration  No.  136,  Profit  and  Loss  Account. 

EXPLANATION.  This  illustration  shows  the  Profit  and  Loss  account  after  the  entries 
affecting  it  in  Illustration  No.  135  have  been  posted.  Compare  with  Illustration  No.  133  which  shows 
the  same  facts  with  the  profit  on  .sales  closed  through  the  Sales  account. 


318 


POST-CLOSING  TRIAL  BALANCE 


J.   A.   WHITNEY  &   CO. 
POST-CLOSING  TRIAL  BAIANCE,    DECELQER.  31,    192 


1 
2 
3 

4 
5 
6 
56 
7 
8 
9 
10 
11 
IE 
13 
14 
15 
16 
17 
18 
19 
20 
21 
22 
£3 
24 
58 
59 
60 
61 
62 
25 
26 
27 
28 
£9 
53 
37 
47 
51 


Merchants  National  Bank 

Petty  Cash 

Notes  Receivable  • 

Notes  Receivable  Discounted 

AccoTirits  Receivable 

Reserve  for  Lo-ubtful  Accounts  Receivable 

Accrued  Rent  on  Cherry  Street  Property 

Subscribers  to  Capital  Stock 

Cherry  Street  Property 

Office  Equipment 

Reserve  for  Depreciation  of  Office  Equip. 

Store  Fixtures 

Reserve  for  Depreciation  of  Store  Fixtures 

Delivery  Equipment 

Reserve  for  Depreciation  of  Delivery  Equip. 

Building 

Reserve  for  Depreciation  of  Building 

Land 

Goodwill 

Office  Supplies 

Advertising  Material 

Warehouse  Material 

Insiirance 

Notes  Payable 

Accounts  Payable 

Accrued  V.'arehouse  Rent 

Accrued  Wages — Branch  Store 

Accrued  Traveling  Expense 

Accrued  Garag-e  Expense 

Accrued  Taxes — Cherry  Street  Property 

Capital  Stock 

Unissued  Capital  Stock 

Subscriptions  to  Capital  Stock 

Treasury  Stock 

Surplus 

1923  Inventory 

Branch  Store 

Interest  Earned 

Interest  Cost 


10496 

50 

,  3338 

10997 

27 

750 

2250 

500 

350 

2018 

3000 

1500 

5063 

82 

119 

63 

91 


10000 

500 

51261 

9127 

14 


91603 


87 


350 
221 

4£ 

£8 

191 

450 


6014 

19953 

150 

135 

87 

122 

'  67 

50000 

1000 

12720 


69 


91603 


00 
42 


25 


44 
00 


28 

02 
00 
42 
65 
50 
50 
00 

00 

69 


45 


87 


Illustration  No.  137,  Post-closing  Trial  Balance. 

EXPLANATION.  This  Trial  Balance  is  taken  from  the  ledger  after  all  closing  and  post- 
closing  entries  have  been  made  and  posted,  to  prove  that  the  ledger  is  in  balance.  The  amounts 
will  be  the  same  as  the  entries  in  the  asset  and  liability  columns  on  the  Working  Sheet,  and  also  the 
accounts  on  the  Balance  Sheet. 


I. 

2. 


QUESTIONS  ON  THE  WORKING  SHEET 

When  and  why  is  the  Working  Sheet  prepared? 

From  what  source  is  the  information  in  the  preparation  of  the  Working 
Sheet  obtained? 

How  is  the  information  in  connection  with  the  inventories,  accruals,  and 
reserves  obtained? 

Why  is  the  amount  of  each  inventory,  accrual  and  reserve  entered  in  both 
the  debit  and  credit  adjustment  columns  on  the  Working  Sheet? 

Why  are  the  amounts  in  the  credit  adjustment  column  added  to  credit  bal- 
ances on  the  Trial  Balance? 

Why  are  entries  in  the  debit  adjustment  column  added  to  debit  balances  on 
the  Trial  Balance? 


QUESTIONS  319 

7.  Why  is  it  necessary  for  the  one  making  the  extensions  on  the  Working  Sheet 

to  know  whether  an  account  on  the  Trial   Balance   shows   an  asset   or   a 
cost,  a  liability  or  an  income? 

8.  Why  is  the  difference  between  the  asset  and  liability  columns  the  net  profit 

or  loss  resulting  from  the  operations  of  the  business? 

9.  Why  is  the  difference  between  the  cost  and  income  columns  the  net  profit 

or  loss  from  the  operations  of  the  business  during  the  year? 
10.     Why  is  the  difference  between  the  asset  and  liability  columns  the  same  as 
the  difference  between  the  income  and  cost  columns? 

QUESTIONS  ON  THE  FINANCIAL  REPORTS 

1.  What  is  the  purpose  of  the  adjusting  entries? 

2.  Why  are  the  adjusting  entries  made  and  posted  before  the  Balance  Sheet  and 

Statement  of  Profit  and  Loss  are  prepared? 

3.  Why  does  the  difference  between  the  assets  and  liabilities  on  the  Balance 

Sheet  show  the  proprietorship  of  the  business? 

4.  Can  the  Balance  Sheet  be  prepared  from  the  Balance  Sheet  columns  on  the 

Working  Sheet  without  reference  to  the  accounts  in  the  ledger? 

5.  Why  is  the  difference  between  the  income  and  operating  cost  shown  on  the 

Statement  of  Profit  and  Loss  the  net  profit  for  the  year? 

6.  Can  the  Statement  of  Profit  and  Loss  be  prepared  from  the  income  and  cost 

columns  on  the  Working  Sheet? 

7.  What  is  the  source  of  the  information  needed  in  making  the  journal  entries 

to  close  the  ledger? 

8.  What  is  the  result  of  posting  the  closing  entries? 

9.  What  is  the  purpose  of  the  post-closing  entries? 

10.     What  is  the  purpose  of  the  post-closing  Trial  Balance? 


Chapter  XXXIII 

MANUFACTURING  ACCOUNTS 

The  Purpose  of  this  Chapter  is  to  explain  the  accounts  needed  to  record 
transactions  which  occur  in  connection  with  the  manufacturing  of  merchandise. 
The  discussion  does  not  relate  to  any  particular  method  of  cost  accounting  but  to 
the  fundamental  accounts  required  wh^n  a  business  manufactures  a  part  or  all 
of  the  merchandise  which  it  sells. 

§  333.  Manufacturing.  The  merchant  buys  the  merchandise  which  he 
sells,  hence  can  easily  ascertain  the  cost  price  of  the  same  through  the  invoices  and 
freight  bills.  The  manufacturer  does  not  sell  the  merchandise  which  he  buys  in 
the  same  form  in  which  he  buys  it,  but  in  a  changed  form.  Because  of  these  changes, 
it  is  necessary  for  him  to  record  facts  in  addition  to  those  needed  by  the  merchant. 

Where  the  operations  of  a  manufacturing  business  are  extensive,  a  cost  ac- 
counting system  is  necessary  in  order  to  ascertain  the  cost  of  each  unit  or  each 
article  manufactured.  Where  the  operations  are  limited  to  a  small  factory  or 
department,  the  cost  of  manufacturing  may  be  ascertained  through  three  accounts: 
Materials,  Labor,  and  Manufacturing  Expense. 

Fixed  assets  other  than  those  used  in  a  mercantile  business  may  be  needed  in  connection  with 
the  manufacturing  of  merchandise,  but  the  nature  of  the  account  with  each  fixed  asset  is  the  same 
as  that  with  office  equipment.  It  is  quite  evident  that  the  insurance  and  depreciation  on  fixed 
assets  purchased  for  use  in  the  manufacturing  department  will  increase  the  cost  of  manufacture  and 
that  this  increase  will  be  shown  through  the  Manufacturing  Expense  account  (§  336);  hence,  no 
special  discussion  is  necessary  for  the  fixed  asset  accounts. 

MATERIALS  ACCOUNT 
§  334.  The  Purpose  of  this  Account  is  to  show  the  cost  of  the  materials 
purchased  for  use  in  the  manufacture  of  the  goods  that  are  to  be  produced  by  the 
factory.  The  nature  of  the  manufacturing  process  and  the  product  resulting 
therefrom,  will  determine  the  nature  of  the  raw  material  purchased.  A  manu- 
facturer of  safes  might  purchase  the  necessary  castings  from  a  foundry  or  he  might 
purchase  the  iron  ore  and  make  the  castings  in  his  own  foundry;  a  printer  might 
buy  the  cases  for  the  books  which  he  manufactures  or  he  might  manufacture  them 
on  his  own  case-making  machines.  The  Materials  account  shows  a  record  of  all 
costs  of  material  purchased  for  use  in  the  factory  which  will  eventually  become  a 
part  of  the  manufactured  article. 

Debit    the     Materials    Account:  Credit    the    Materials    Account: 

%  I.  For  the  cost  of  material  pur-  *\  2.  For  any  adjustments  which  re- 
chased,  which  includes  the  duce  the  cost  of  material 
invoice  and  transportation  purchased  as  shown  by  the 
cost.  debit  side. 

^  3.  The  Balance  of  the  Materials  Account  at  the  close  of  the  fiscal  period 
shows  the  cost  of  material  purchased  during  the  period.  It  is  shown  on  the  State- 
ment of  Profit  and  Loss  (§  340)  as  one  of  the  costs  of  goods  manufactured. 

If  a  separate  record  is  kept  of  the  material  in  the  storeroom  and  the  material  in  process  of 
manufacture,  it  is  necessary  to  maintain  a  Materials  in  Process  account.  This  Materials  in  Process 
account  is  debited  with  the  cost  of  material  taken  out  of  the  storeroom  and  transferred  to  the  factory, 
and  the  Materials  account  is  credited  for  the  same  amount.  At  the  close  of  the  fiscal  period  the 
balance  of  the  Materials  in  Process  account  is  transferred  to  the  Manufacturing  account  (§347)- 

320 


MANUFACTURING  ACCOUNTS  321 

LABOR  ACCOUNT 

§  335.  The  Purpose  of  this  Account  is  to  show  the  cost  of  direct  labor 
in  the  manufacturing  department.  Labor  is  divided  into  two  classes:  (a)  that 
performed  by  employees  who  are  engaged  in  the  manufacture  of  the  product  sold, 
usually  referred  to  as  "direct"  labor;  (b)  that  performed  by  employees  whose 
work  is  not  applied  direct  to  the  product  manufactured,  usually  referred  to  as 
"indirect"  labor. 

Debit  the  Labor  Account:  Credit  the  Labor  Account: 

^  I.     For    the    direct    labor    cost    as  %  2.     For  any  adjustments  which  re- 

shown  by  the  pay  roll.  duce  the  direct  labor  cost. 

^  3.  The  Balance  of  the  Labor  Account  at  the  close  of  the  fiscal  period  shows 
the  direct  labor  cost  for  the  period.  It  is  one  of  the  costs  of  the  goods  manufactured 
and  is  shown  as  such  on  the  Statement  of  Profit  and  Loss  (§  340). 

MANUFACTURING  EXPENSE  ACCOUNT 
§  336.  The  Purpose  of  this  Account  is  to  show  the  cost  of  the  various 
expenses  incurred  in  the  factory  which  can  not  be  debited  to  the  Materials  or 
Labor  accounts.  These  costs  include  factory  expenses  (rent,  heat,  light,  etc.), 
indirect  labor  (superintendent's  and  foremen's  salaries,  wages  of  elevator  operators, 
janitors,  etc.),  insurance  and  depreciation  on  fixed  assets  used  in  the  manufacturing 
department,  etc.  The  manufacturing  expenses  are  so  varied  that  it  is  sometimes 
advisable  to  group  them  in  several  classes  and  record  transactions  affecting 
each  class  in  a  separate  account. 

Debit  this  Account:  Credit  this  Account: 

^  I.     For  all  expenses  in  the  factory  ^  2.     For  any  adjustments  which  re- 

which    are   not  applicable   to  duce    the    debit    to    this    ac- 

materials  or  direct  labor  cost.  count. 

II  3.  The  Balance  of  the  Manufacturing  Expense  Account  at  the  close  of  the 
fiscal  period  shows  the  manufacturing  expenses  for  the  period.  This  is  one  of  the 
costs  of  the  goods  manufactured  and  is  shown  as  such  on  the  Statement  of  Profit 
and  Loss  (§  340). 

§  337.  Method  of  Ascertaining  Cost  of  Goods  Manufactured  and 
Sold.  At  the  close  of  the  first  fiscal  period,  the  cost  of  material  purchased  during 
the  period  is  shown  by  the  Materials  account,  labor  cost  by  the  Labor  account, 
and  manufacturing  expense  by  the  Manufacturing  Expense  account.  The 
total  of  these  three  costs  will  equal  the  cost  of  goods  manufactured  during  the 
year,  except  the  goods  which  are  in  process  of  manufacture  at  the  close  of  the 
fiscal  period;  it  is  not  practical  to  finish  all  jobs  which  are  in  process  of  manu- 
facture at  the  close  of  the  fiscal  period. 

To  ascertain  the  cost  of  the  goods  manufactured,  it  is  necessary  to  take  an 
inventory  of  the  goods  which  are  in  process  of  manufacture  because  this  value 
must  be  deducted  from  the  total  cost  of  manufacturing  for  the  period.  The  in- 
ventory of  goods  in  process  includes  the  cost  of  the  material,  labor,  and  manu- 
facturing expense  applicable  to  these  goods.  The  difference  between  the  total 
cost  of  materials,  labor,  and  manufacturing  expense  during  the  period,  less  the 
cost  of  these  items  in  the  goods  in  process,  is  the  cost  of  the  goods  manufactured 
during  the  period  (finished  goods). 

The  value  of  goods  manufactured  but  not  sold  is  ascertained  by  an  inventory, 
and  the  amount  deducted  from  the  cost  of  all  the  goods  manufactured  to  ascertain 
the  cost  of  the  goods  sold,  in  the  same  manner  as  the  merchandise  inventory  at 
the  close  of  the  period  is  deducted  from  the  total  purchases  cost  to  ascertain  the 
cost  of  goods  sold  in  a  trading  business. 


322  MANUFACTURING  ACCOUNTS 

MANUFACTURING  ACCOUNT 

§  338.  The  Purpose  of  this  Account  is  to  show  the  combined  materials, 
labor,  and  manufacturing  expense  applicable  to  the  cost  of  merchandise  manufactured 
in  the  factory  during  the  fiscal  period.  It  is  a  summary  account  used  in  closing 
the  ledger  and  is  not  debited  or  credited  with  any  transactions  that  occur  during 
the  period. 

Debit  the  Manufacturing  Account:  Credit  the  Manufacturing  Account: 

^  I.     For  the  inventory  of  goods  in  ^  3.     For   the  inventory  of  goods  in 

process   at    the    beginning   of  process    at    the    close    of    the 

the    fiscal    period.  .  fiscal   period. 

^  2.     For  the  balances  of  the  Materials, 

Labor,     and     Manufacturing 

Expense  accounts. 

^  4.  The  Balance  of  the  Manufacturing  Account  shows  the  cost  of  goods 
manufactured  during  the  fiscal  period.  It  is  a  summary  account  used  in  closing  the 
ledger  and  does  not  appear  on  the  Statement  of  Profit  and  Loss. 

The  unit  cost  of  the  articles  manufactured  may  be  ascertained  by  dividing  the  number  of 
units  manufactured  into  the  total  cost  of  manufacture.  It  is  customary  to  make  monthly  tests  of 
the  unit  cost,  as  the  cost  may  vary  during  the  year  to  such  an  extent  that  the  profit  on  sales  will 
be  affected,  unless  the  sale  price  is  based  on  the  changed  cost  price.  The  best  method  of  ascertaining 
the  unit  cost  of  the  articles  manufactured  is  through  a  complete  cost  system;  the  method  of  ascer- 
taining the  unit  cost  through  such  a  system  is  thoroughly  explained  in  the  chapters  relating  to  cost 
accounting.  The  purpose  of  the  discussion  of  the  accounts  in  connection  with  manufacturing  at 
this  time  is  to  show  the  student  a  method  which  is  practical,  when  the  volume  of  goods  manufactured 
does  not  justify  the  expense  of  an  elaborate  cost  system. 

TRADING  ACCOUNT 

§  339.  The  Purpose  of  this  Account  is  to  show  the  gross  profit  on  sales 
of  merchandise.  In  a  business  which  manufactures  a  part  or  all  of  the  goods 
sold,  this  account  will  show  the  facts  set  forth  by  the  Statement  of  Profit  and  Loss 
beginning  with  the  balance  of  the  Manufacturing  account  (cost  of  goods  manu- 
factured) ;  in  a  business  which  buys  all  the  merchandise  which  it  sells,  it  will  show 
the  facts  beginning  with  the  purchase  of  merchandise.  The  Manufacturing  account 
and  the  Trading  account  are  usually  opened  in  the  ledger  as  sections  of  the  Profit 
and  Loss  account  so  that  all  the  facts  which  appear  on  the  Statement  of  Profit 
and  Loss  may  be  shown  in  one  account.  The  Trading  account  is  a  summary  ac- 
count used  in  closing  the  ledger  and  does  not  appear  on  the  Statement  of  Profit 
and  Loss. 

Debit    the    Trading    Account:  Credit    the    Trading   Account: 

^  I.     For    the    balance    of    the    Pur-  1[  4.     For    the    balance    of    the    Sales 

chases    or    the     Manufactur-  account. 

ing  account.  H  5.     For    the    balances    of    the    Pur- 

^  2.     For   the   balances   of   the   Sales  chases  Returns  and  Purchases 

Returns  and  Sales  Allowances  Allowances  accounts. 

accounts.  H  6.     For  the  merchandise  inventory 

^  3.     For  the  merchandise  inventory  or   the   inventory   of   finished 

or   the   inventory   of   finished  goods  at  the  close  of  the  fiscal 

goods    at    the    beginning    of  period. 

the  fiscal   period. 

^  7.  The  Balance  of  the  Trading  Account  shows  the  gross  profit  or  loss  on 
sales,  and  is  transferred  to  the  Profit  and  Loss  account  in  the  same  manner  as  the 
Sales  account  is  closed  into  the  Profit  and  Loss  account.  If  the  Trading  account 
is  a  section  of  the  Profit  and  Loss  account,  the  Profit  and  Loss  account  is  ruled  and 
the  balance  carried  down,  as  in  Illustration  No.  136. 


MANUFACTURING  PROCESS 


323 


§  340.  The  Manufacturing  Process,  as  explained  in  connection  with  the 
Materials,  Labor,  and  Manufacturing  Expense  accounts,  is  illustrated  by  the 
transactions  and  entries  which  follow: 

December  31,  1922,  the  Candy  Kitchen  had  in  stock  manufactured  candy, 
$1,645.87,  candy  in  process  of  manufacture,  $1,637.52,  and  materials  in  stock, 
$3,560.42.  During  the  year,  purchases  of  sugar,  flavoring,  and  other  material  used 
in  manufacturing  candy  amounted  to$ii,642.87;  thelabor  cost,  $5,261.40;  and  the 
manufacturing  expense,  $4,137.18.  The  sales  of  candy  during  the  year  amounted 
to  $21,000.00.  At  the  close  of  the  year,  December  31,  1923,  the  inventory  of  man- 
ufactured candy  was  $3,009.50,  the  inventory  of  candy  in  process,  $1,542.91,  and 
the  inventory  of  materials,  $4,859.77. 

One  entry  in  journal  form  to  record  the  materials  cost,  one  to  record  the  labor 
cost,  and  one  to  record  the  manufacturing  cost,  assuming  that  cash  was  paid, 
would  appear  as  follows: 


Materials 

Cash 

Labor 

Cash 

Manufacturing  Expense 

Cash 


11,642 

87 

1 1 ,642 

5.261 

40 

5.261 

4.137 

18 

4,137 

The  manufacturing  section  of  the  Statement  of  Profit  and  Loss  prepared  from 
the  three  accounts  and  the  inventories  at  the  beginning  and  close  of  the  period, 
would  appear  as  follows: 

CANDY  KITCHEN 
Statement  of  Profit  and  Loss,  December  31,  1923. 


Manufacturing  Section 

Inventory  of  Materials,  Dec.  31,  1922 

Add  Materials  purchased  during  period 


Total  Materials  Cost 

Deduct  Inventory  of  Materials,  Dec.  31,  1923. 


Materials  Placed  in  Process  during  period 

Labor  Placed  in  Process  during  period 

Mfg.  Expense  Placed  in  Process  during  period. 


Total  Materials,  Labor,  and  Mfg.  Expense  Placed  in  Process. 

Add: 

Inventory  of  Goods  in  Process,  December  31,  1922 


Deduct: 

Inventory  of  Goods  in  Process,  December  31,  1923 

Cost  of  Goods  Manufactured 


3.560.42 
11,642.87 


15,203.29 
4.859-77 


10,343.52 
5,261.40 
4,137.18 


19,742.10 
1,637-52 


21,379.62 
1,542-91 


19,836.71 

The  trading  section  of  the  same  Statement  of  Profit  and  Loss  would  appear  as 
follows : 


Trading  Section 


Sales 

Cost  of  Goods  Sold : 

1922  Inventory  of  Finished  Goods 1,645 .87 

Cost  of  Goods  Manufactured  (per  Mfg.  Section) 19,836.71 


Less  1923  Inventory  of  Finished  Goods. 

Net  Cost  of  Goods  Sold 

Gross  Profit  on  Sales 


21,482.58 
3,009.50 


21,000.00 


18,473.08 


2,526.92 


324 


MANUFACTURING  PROCESS 


The  entry  to  dose  the  1922  inventory  accounts  with  materials  and  materials 
in  process  and  the  balances  of  the  Materials,  Labor  and  Manufacturing  Expense 
accounts  into  the  Manufacturing  account  will  appear  in  journal  form  as  follows: 


Manufacturing 

1922  Inventory  of  Materials 

Materials 

Labor 

Manufacturing  Expense 

1922  Inventory  of  Materials  in  Process. 


26,239 


39 


3,560 
11,642 
5,261 
4.137 
1.637 


The  entry  to  place  the  1923  inventories  of  materials  and  materials  in  process 
of  manufacture  in  the  ledger  would  appear  in  journal  form  as  follows: 


1923  Inventory  of  Materials 

1923   Inventory  of  Materials  in  Process. 
Manufacturing 


4.859 
1,542 


6,402 


68 


The  balance  of  the  Manufacturing  account,  which  shows  the  cost  of  the  goods 
manufactured  during  the  year,  may  be  closed  directly  into  the  Profit  and  Loss  ac- 
count or  closed  through  the  Trading  account.  The  following  entry  applies  to  the 
latter  method: 


Trading 

Manufacturing. 


19.836 


71 


19,836 


71 


The  entry  to  close  the  1922  Inventory  of  Finished  Goods  account  into  the 
Trading  account  will  be  as  follows: 


Trading 

1922  Inventory  of  Finished  Goods. 


1.645 


87 


1,645 


87 


The  entries  to  close  the  Sales  account  into  the  Trading  account  and  to  place 
the  1923  Inventory  of  Finished  Goods  in  the  ledger  may  be  combined  as  follows: 


Sales 

1923  Inventory  of  Finished  Goods. 
Trading 


2 1, 000  j  00 
3,00950 


24,009 


50 


The  balance  of  the  Trading  account,  which  shows  the  gross  profit  on  sales, 
is  closed  into  the  Profit  and  Loss  account  by  the  following  entry: 


Trading 

Profit  and  Loss. 


2,52692 


2,526 


92 


The  operating  and  non-operating  incomes  and  expenses  would  be  closed  into 
Profit  and  Loss  as  explained  and  illustrated  in  previous  chapters.  The  balance 
of  the  Profit  and  Loss  account,  which  shows  the  net  income,  is  then  closed  into 
the  Surplus  account,  and  any  appropriation  for  dividends  or  for  any  other  special 
purpose  is  taken  out  of  Surplus  by  an  entry  debiting  Surplus  and  crediting  the 
account  which  is  to  show  the  amount  of  the  appropriation. 


EXERCISES 


325 


Exercise  No.  104,  Purchase  of  the  Stock  of  One  Corporation  by  Another. 

The  Johnson  Candy  Co.  is  incorporated  with  a  capital  stock  of  $250,000.00 
(2,500  shares),  all  common,  $200,000.00  of  which  is  subscribed  and  paid  for.  October 
5  the  stockholders  of  the  Day  Candy  Company  agree  to  sell  their  stock  (par  value, 
$100.00)  to  the  Johnson  Candy  Company  at  $90.00  per  share,  and  to  accept  in 
payment  an  equal  number  of  shares  in  the  Johnson  Candy  Company,  paying  the 
Johnson  Candy  Company  cash  for  the  difference.  A  Balance  Sheet  prepared  from 
the  books  of  the  Day  Candy  Company  is  as  follows: 

DAY  CANDY  COMPANY 
Balance  Sheet,  October  10,  192.. 


Assets 
Current  Assets: 

Cash 

Notes  Receivable 

Accounts  Receivable 15375  oo 

Less  Reserve  for  Bad  Debts i68  .  lo 

Inventories,  October  lo,  192.  .  : 

Boxed  Candy  in  Stock 

Bulk  Candy  in  Stock 

Raw  Material  in  Stock 

Boxes  in  Stock 

Barrels,  etc.,  in  Stock 

Fixed  Assets: 

Land 

Plant  and  Equipment 24600 .00 

Less  Reserve  for  Depreciation 6150.00 

Delivery  Equipment 2650 .00 

Less  Reserve  for  Depreciatioh 530 .00 

Office  Equipment 500  .  00 

Less  Reserve  for  Depreciation 50  .00 

Deferred  Charges  to  Operation: 

Factory  Supplies  on  Hand 

Office  Supplies  on  Hand 

Prepaid  Insurance 

Total  Assets  and  Deferred  Charges 

Liabilities  and  Proprietorship 
Current  Liabilities: 

Notes  Payable 

Accounts  Payable 

Fixed  Liabilities: 

Mortgage  Payable,  5% 

Proprietorship: 

Capital  Stock  Issued  and  Outstanding 

Surplus 

Total  Liabilities  and  Proprietorship 


6000 
2450 

15206 

4752 

3041 

10933 

349 

237 


15000 

18450 

2120 

450 


345 
10^ 
396 


12000 
6144 


5000c 
1692 


90 


42971 


36020 


845 


79837 


18144 


51692 


7983: 


65 


59 


The  stockholders  of  the  Day  Candy  Company  and  the  number  of  shares  held 
by  each  are  as  follows: 

Kenton  Grocery  Co.,  250  shares;  Benjamin  A.  Dawson,  30  shares;  M.  F.  Carr,  10  shares; 
S.  G.  Boone,  35  shares;  Judson  Gilbert,  20  shares;  D.  X.  Bloom,  15  shares;  E.  H.  Baldridge,  50 
shares;   H.  T.  Asbury,  25  shares;    Robert  Janson,  15  shares;   H.  A.  DeCamp,  50  shares. 

October  10,  the  Johnson  Candy  Company  issues  a  certificate  of  stock  to  each 
stockholder  of  the  Day  Candy  Company  for  the  number  of  shares  of -the  Day 
Candy  Company  stock  which  he  holds;   cash  is  received  from  each  for  the  difference 


326  EXERCISES 

between  $90.00  per  share  and  $100.00  per  share.  Judson  Gilbert,  who  holds  twenty 
shares  of  the  Day  Candy  Company  stock,  was  not  present  at  the  meeting  when 
the  consolidation  was  effected  and  refused  to  exchange  his  stock.  A  compromise 
was  effected  by  the  Johnson  Candy  Company's  paying  him  $1,850.00  on  his  sur- 
render of  the  certificate  calling  for  twenty  shares  of  the  Day  Candy  Company 
stock. 

1,  Make  the  entries  to  close  the  books  of  the  Day  Candy  Company. 

2.  Make  the  entries  on  the  books  of  the  Johnson  Candy  Company  to  record 
(a)  the  purchase  of  the  stock  of  the  Day  Candy  Company,  and  (b)  the  assets  re- 
ceived from  the  Day  Candy  Company  and  the  liabilities  assumed. 

Exercise  No.  104,  Manufacturing. 

The  following  transactions  were  completed  by  the  Roberts  Clothing  Company, 
manufacturers  of  men's  clothing,  during  the  month  of  July,  192-  • : 
I.     Purchased  from  the  Globe  Clothing  Co.,  Chicago,  cloth  per  invoice  of  May  28, 
$1,652.75. 

5.  Paid  for  required  machinery,  $18.75. 

6.  Payroll  for  the  week,  $1,627.75,  $500.00  for  superintendent  and  foremen,  and 

the  balance  for  employees. 

10.     Purchased  from  the  Maryland  Manufacturing  Company,  City,  cloth,  buttons 
and  thread  per  invoice  of  this  date,  $1,252.50. 

13.     Payroll  for  the  week,  $1,765.30,  $500.00  for  superintendent  and  foremen,  and 
the  balance  for  employees. 

15.     Paid  freight  on  the  clothing  purchased  from  the  Globe  Clothing  Co.,  $96.50. 

18.     Paid  for  repairs  on  machinery,  $36.75. 

20.     Payroll  for  the  week,  $1,639.27,  $500.00  for  superintendent  and  foremen,  and 
the  balance  for  employees. 

24.     Purchased  from  the  Seaman  Manufacturing  Company,  City,  cloth  and  buttons 
per  invoice  of  this  date,  $1,448.57. 

27.     Payroll  for  the  week,  $1,601.07,  $500.00  for  superintendent  and  foremen,  and 
the  balance  for  employees. 

30.  Sales  to  customers  on  account  during  the  month,  $8,562.50.  Prepare  a  manu- 
facturing statement  showing  the  cost  of  merchandise  manufactured  and 
sold.  All  goods  manufactured  have  been  sold  to  customers.  The  value 
of  goods  in  process  at  the  beginning  of  the  month  was  $2,742.65,  and  at  the 
close  of  the  month,  $3,117.65. 
Record  these  transactions  in  journal  form,  post  to  the  accounts,  make  the 

adjusting  entries  for  the  goods  in  process,   post,  and  prepare  a  manufacturing 

statement. 

QUESTIONS 

1.  Distinguish  between  a  merchant  and  a  manufacturer. 

2.  What  information  in  connection  with  purchases  does  a  manufacturer  need 

that  the  merchant  does  not  need? 

3.  Name  some  of   the  materials  which   a   manufacturer   of   automobiles  would 

need  to  buy. 

4.  Name  some  of  the  finished  products  in  connection  with  the  manufacturing 

of  automobiles  which  the  manufacturer  might  buy. 

5.  What  is  manufacturing  expense? 

6.  How  does  manufacturing  expense  differ  from  selling  expense? 

7.  What   are    the    three   principal    costs   which   enter   into   the  manufacture  of 

merchandise? 

8.  Would  the  manufacturer   have  a  Sales  account  in  his  ledger?     a  Purchases 

account? 

9.  Wh^t  facts  does  the  Manufacturing  account  show?     the   Trading  account? 
10.     When  are  the  Manufacturing  and  Trading  accounts  opened?    closed?     How? 


Chapter  XXXIV 

COMPARATIVE  REPORTS 

The  Purpose  of  this  Chapter  is  to  explain  and  illustrate  the  Comparative 
Balance  Sheet  and  the  Comparative  Statement  of  Profit  and  Loss.  When  properly- 
analyzed,  much  valuable  information  can  be  obtained  from  reports  which  show 
the  condition  of  the  business  at  the  conclusion  of  two  or  more  consecutive  fiscal 
periods.  These  reports  will  be  of  assistance  to  the  management  in  planning  future 
operations  of  the  business. 

§  341.  A  Comparative  Balance  Sheet  shows  the  assets,  liabilities,  and 
proprietorship  for  two  or  more  consecutive  fiscal  periods.  The  information  on  the 
report  is  arranged  in  the  same  manner  as  the  Balance  Sheet  prepared  at  the  con- 
clusion of  a  fiscal  period,  except  that  two  or  more  columns  are  provided  for  showing 
the  amounts  involved.  Illustration  No.  138  shows  a  Comparative  Balance  Sheet 
prepared  from  the  asset,  liability,  and  proprietorship  accounts  of  the  American 
Mercantile  Co.,  a  corporation,  at  the  conclusion  of  the  fiscal  periods  ending  Decem- 
ber 31,  1921,  and  December  31,  1922. 

§  342.  Analysis  of  a  Comparative  Balance  Sheet.  An  analysis  of 
Illustration  No.  138  shows  the  following  facts:  The  cash  balance  has  decreased, 
and  the  notes  receivable  and  accounts  receivable  have  increased.  While  the  total 
current  assets  have  increased,  yet  the  decrease  in  the  cash  balance  and  increase  in 
accounts  receivable  indicate  that  collections  for  1922  have  not  been  so  good  as  for  1921. 
The  fixed  assets  show  an  increase  because  of  the  additional  investment  in  land. 
The  total  current  liabilities  have  increased  $5,000.00  due  to  an  increase  in  the 
accounts  payable  and  notes  payable  to  creditors.  The  increase  in  proprietorship 
is  shown  by  the  increase  in  the  Surplus  account.  Much  valuable  information 
can  be  gained  from  a  Comparative  Balance  Sheet  both  by  the  owner  of  the  busi- 
ness and  those  outside  of  the  business  who  are  interested  in  it. 

§  343.  A  Comparative  Statement  of  Profit  and  Loss  shows  the  income 
and  cost  resulting  from  the  operations  of  a  business  for  two  or  more  consecutive 
periods.  The  information  is  arranged  in  the  same  manner  as  on  the  Statement 
of  Profit  and  Loss  at  the  conclusion  of  a  fiscal  period  except  two  or  more  columns 
are  provided  for  the  amounts  involved.  Illustration  No.  139  shows  a  Comparative 
Statement  of  Profit  and  Loss  prepared  from  the  cost  and  income  accounts  on  the 
ledger  of  the  American  Mercantile  Co.  for  the  fiscal  periods  ending  December  31, 
1921,  and  December  31,  1922. 

§  344.     Analysis    of    a    Comparative    Statement    of   Profit   and   Loss. 

An  analysis  of  Illustration  No.  139  shows  the  following:  The  sales  in  1922  show 
an  increase  of  more  than  $34,000.00,  the  cost  of  merchandise  an  increase  of  more 
than  $20,000.00,  and  the  cost  of  operating  the  business  an  increase  of  more  than 
$10,000.00.    This  indicates  that  a  greater  profit  has  been  made  on  the  volume  of 

{Concluded  on  page  32Q) 
327 


328 


COMPARATIVE  REPORTS 


THE  AMERICAN  MERCANTILE  COMPANY 
Comparative  Balance  Sheet  for  Two  Years  Ending  December  31,  1922 


Assets 

Dec.  3 

I,   1921 

Dec.  31 

.   1922 

Increase 

or 
Decrease 

Current  Assets: 
Cash 

Notes  Receivable 
Accounts  Receivable 

Less  Reserve  for  D'btful  Accts 

4000^  00 
40.00 

44573-20 
1650.00 

3960.00 

14079.60 
19.40 

7000 . 00 
110.00 

38706.10 
4300 . 00 

6890.00 

18990.40 
85.00 

5867  .10 
2650.00 

2930.00 

Merchandise  Inventory 
Accrued  Interest  Earned 

1250.00 
62.50 

1250.00 
125.00 

4910.80 
65.60 

Total  Current  Assets 

64282.20 

68971.50 

4689.30 

Fixed  Assets: 

Office  Equipment 

Less  Reserve  for  Depreciation 

1187.50 

1850.00 

4050 . 00 

9750.00 
5000 . 00 

1125.00 

1 700 . 00 

3600.00 

9500.00 
15000.00 

62 .50 

Store  Fixtures 

Less  Reserve  for  Depreciation 

2000.00 
150.00 

2000 . 00 
300 . 00 

150 . 00 

Delivery  Equipment 

Less  Reserve  for  Depreciation 

4500.00 
450.00 

4500.00 
900 . 00 

450  .00 

Building 

Less  Reserve  for  Depreciation 

10000.00 
250.00 

10000.00 
500.00 

250  .00 

Land 

10000.00 

Total  Fixed  Assets 
Goodwill 

21837.50 
15000.00 

30925.00 

1 5000 . 00 

9087.50 

Total  Assets 
Deferred  Charges  per  Schedule 

101119.70 

454 -30 

114896.50 

1314-50 

13776.80 
860.20 

Total  Assets  and  Deferred  Charges 

101574.OC 

116211 .00 

14637.00 

Liabilities  and  Proprietorship 

Current  Liabilities: 
Notes  Payable — Bank 
Notes  Payable — Creditors 
Accounts  Payable 
Accrued  Wages 
Accrued  Interest  Cost 

5000 . 00 

2000.00 

38000.00 

495.00 

155-00 

45650.00 
55924 -oc 

2500.0c 

47600.00 

568 . oc 

54.00 

50722.00 

65489.00 

5000 .00 
500 . 00 

9600 . 00 

73.00 

loi .00 

Total  Current  Liabilities 
Proprietorship: 
Capital  Stock 
Surplus 

50000.00 
5924.00 

50000 . oc 

15489.00 

5072.00 
9565.00 

Total  Proprietorship 

9565.00 

Total  Liabilities  and  Proprietorship 

101.S740C 

1162TI .oc 

14637.00 

Illustration  No.  138,  Comparative  Balance  Sheet. 

EXPLANATION.  The  names  of  the  accounts  and  the  figures  in  the  first  two  amount  columns 
are  applicable  to  the  Balance  Sheet  for  1921,  and  the  names  of  the  accounts  and  the  figures  in  the 
second  two  amount  columns,  to  the  Balance  Sheet  for  1922.  The  increase  or  decrease  is  shown  in 
the  last  column  at  the  right,  decreases  being  printed  in  italic.  If  desired,  an  additional  column 
may  be  provided  at  the  right  in  which  to  record  the  percentage  of  increase  or  decrease  as  explained 
in   §  349  and  Illustration  No.   145. 


COMPARATIVE  REPORTS 


329 


THE  AMERICAN  MERCANTILE  COMPANY 
Comparative  Statement  of  Profit  and  Loss  for  Two  Years  Ending  December  31,  1922 


Dec.  31 

.   1921 

Dec.  3 

[,  1922 

Increase 

or 
Decrease 

Returns  from  Sales: 
Gross  Sales 
Less  Sales  Returns  and  Allowances 

16910.80 
63981 .30 
10663.50 

110000.00 
3600.00 

14079.60 
89246.40 
14874.40 

145000.00 
4000 . 00 

35000.00 
400 . 00 

Net  Returns  from  Sales 
Cost  of  Goods  Sold: 

Inventory  at  beginning  of  year 

Purchases 

Freight  and  Drayage  In 

106400.00 
77476. 00 

1 4 1 000 . 00 
99210.00 

34600 . 00 

2831 .20 

25265.10 

4210.90 

Total  Purchases  Cost 

Less  Inventory  at  end  of  year 

91555-60 
14079.60 

118200.40 
18990.40 

26644 • 80 
4910.80 

Net  Cost  of  Goods  Sold 

3850.00 
7700.00 
4400 . 00 
6600 . 00 

6525.00 

13050.00 

8700.00 

4350.00 

21734.00 

Gross  Profit  on  Sales 
Operating  Expenses: 
Buying  Expense 
Selling  Expense 
Delivery  Expense 
Administrative  Expense 

28924.00 
22550.00 

41790.00 
32625.00 

12866.00 

2675.00 
5350.00 
4300 . 00 

22 jo . 00 

Total  Operating  Expenses 

250.00 
500 . 00 

650.00 
850.00 

10075.00 

Net  Profit  from  Operation 
Other  Income: 
Interest  Earned 
Purchases  Discount 

6374.00 
750.00 

9165.00 
1500.00 

2791 .00 

400.00 
350.00 

Total  Other  Income 

500.00 
700 . 00 

100.00 
1000.00 

750.00 

Gross  Income 
Deductions  from  Income: 
Interest  Cost 
Sales  Discount 

7124. oc 
I 200.0c 

10665.00 
1100.00 

3541-00 

400.00 
300 . 00 

Total  Deductions  from  Income 

100 .00 

Net  Income  Carried  to  Surplus 

5924 . 00 

9565 . 00 

3641 .00 

Illustration  No.  139,  Comparative  Statement  of  Profit  and  Loss 

EXPLANATION.  The  names  of  the  accounts  and  the  figures  in  the  first  two  amount  columns 
are  applicable  to  the  Statement  of  Profit  and  Loss  for'1921,  andthe  names  of  the  accounts  and  the 
figures  in  the  second  two  amount  columns,  to  the  Statement  of  Profit  and  Loss  for  1922.  The  in- 
crease or  decrease  is  shown  in  the  last  column  at  the  right,  decreases  being  printed  in  italic.  If 
desired,  an  additional  column  may  be  provided  at  the  right  in  which  to  record  the  percentage  of 
increase  or  decrease  as  explained  in  §349  and  Illustration  No.  145. 

(Continued  from  page  32/) 
sales  because  the  increase  in  the  costs  is  not  so  great  as  the  increase  in  the  income. 
The  purchases  during  1922  show  an  increase  of  more  than  $25,000.00,  but  this  is 
to  be  expected  on  account  of  the  increase  in  sales.  The  inventory  at  the  close  of 
1922  shows  an  increase  over  that  at  the  close  of  192 1,  but  this  is  to  be  expected 
because  of  the  increase  in  purchases.  The  net  profit  on  sales  shows  an  increase 
of  more  than  $12,000.00.  The  operating  income  for  1922  shows  an  increase  of 
almost  $3,000.00   and   the   non-operating  income  an   increase  of  $750.00.     The 


330 


GRAPHS 


operating  expense  for  1922  shows  an  increase  of  more  than  $10,000.00,  but  the 
non-operating  expense  shows  a  decrease  of  $100.00.  The  net  profit  for  1922  shows 
an  increase  of  more  than  $3,500.00,  but  this  is  not  in  proportion  to  the  increase 
in  sales,  hence  indicates  that  the  operating  cost  has  increased  out  of  proportion 
to  the  increase  in  sales. 

§  345.  A  Graph  or  graphical  chart  is  a  pictorial  presentation  of  comparative 
facts.  There  are  three  forms  of  graphs  in  general  use,  (a)  the  bar  graph,  (b)  the 
curved  graph,  and  (c)  the  circular  graph.  Each  of  these  forms  may  be  used  in 
presenting  facts  shown  on  the  reports  prepared  from  bookkeeping  records.  The 
facts  usually  set  forth  in  graphic  form  are  (a)  comparison  of  sales  for  two  or  more 
periods,  (b)  comparison  of  selling  expense  for  two  or  more  periods,  (c)  comparison 

{Concluded  on  page  331) 


10         20        30         40        50       60         70        80        90         100       110       I20       130      140        150       160       170       180       190 

T  TTTTl  1 1 1 1  M  M  1 1 1 1 1 1 1 1 1 1 1 1  M  1  M  1 1 1 1 1 1 1 1 1 1 1 1 1 1 1 1  m  "               i 

■■■■■■ 

Illustration  No.  140,  Horizontal  Bar  Graph. 

EXPLANATION.     This  shows  a  comparison  of  the  sales  for  the  two  years  in  Illustration 
No.  139.     The  unit  in  each  bar  is  based  on  $10,000.00. 


^^^              ,.    .  .            ^^^           B^^V 

^^H                          ^^^m        ^^H' 

ugm    ^^^.    ^^^    ^^^    ^^B — 

^^H        ^^^        ^^^       ^^^m       -^^^        ^^H 

^^M        ^^™        ^^^        ^^^        ^^■-  ■      ^^B 

^^H          ^^^          ^^^         ^^^          ^^^         ^^H 

Illustration  No.  141,  Vertical  Bar  Graph. 

EXPLANATION.     The   figures   used  in  this  graph  are  given   in  the  second  paragraph  of 
§346.     The  unit  in  each  bar  is  based  on  $10,000.00. 


BAR  GRAPH 


331 


of  sales  and  selling  expense  for  one  or  more  periods,  (d)  comparison  of  purchases 
with  purchases  expense  for  one  or  more  periods,  (e)  comparison  of  purchases  with 
sales  for  one  or  more  periods,  (f)  comparison  of  current  assets  for  two  or  more 
periods,  (g)  comparison  of  fixed  assets  for  two  or  more  periods,  and  (h)  comparison 
of  current  liabilities  for  two  or  more  periods;  any  other  facts  shown  on  the  reports 
submitted  by  the  bookkeeper  to  the  manager  of  a  business  can  be  presented  in 
pictorial  form. 

§  346.  A  Bar  Graph  is  used  to  compare  totals  for  two  or  more  periods. 
Thus,  if  it  is  desired  to  show  in  pictorial  form  by  a  bar  graph  the  sales  for  the  two 
years  in  the  comparative  Statement  of  Profit  and  Loss  in  Illustration  No.  139, 
the  bars  would  be  arranged  as  in  Illustration  No.  140. 

If  the  comparison  of  sales  is  for  six  periods,  the  sales  for  the  first  year  being 
$50,000.00,  for  the  second,  $60,000.00,  for  the  third,  $80,000.00,  for  the  fourth, 
$65,000.00,  for  the  fifth,  $75,000.00,  and  for  the  sixth,  $85,000.00,  the  facts  pre- 
sented in  bar  graph  form  would  appear  as  in  Illustration  No.  141. 

If  desired,  the  bars  in  the  bar  graph  may  be  made  to  show  a  comparison  of 
more  than  one  group  of  figures.  Thus,  if  it  is  desired  to  show  net  sales,  cost  of  sales, 
selling  expense  and  administrative  expense  on  the  same  bar  graph  for  the  two 
periods  in  Illustration  No.  139,  the  graph  would  appear  as  in  Illustration  No.  142. 


^^H 

^^B 

^^^^H             ^^^^H 

^^^^H            ^^^^H 

^^^             ^^^ 

-^^H          ^^^U          ^^^ 

^^^            ^^H 

^^H          -^^^           ^^^ 

^^^           ^^H        i.    ' 

pW-v-ta     L                     ^^^       ^^^       ^^^ 

^^^m         ^^^m 

l-_  - -. 

^^m        ^^m 

■I:.-  ,                      i^^Ki  i^^Hi-.-^^K--            - 

^■..^H^      1 

^H                                   '^^^H       - -^^^m       ~^^^^-- 

^^     M-y^jyi              ^^m        ^^h        ^^h      -t'Vfl^'rf'f 

— !■— "-■— H 

t 

1  ^^        ^Hl 

Illustration  No.  142,  Vertical  Bar  Graph. 

EXPLANATION.  The  first  four  bars  show  the  sales,  cost  of  sales,  selling  expense  (including 
delivery  expense),  and  administrative  expense  for  1921,  and  the  second  four  bars  the  same  facts 
for  1922  (Illustration  No.  139).  Each  bar  is  divided  into  ten  units  of  $10,000.00  each,  and  each 
unit  is  subdivided  into  $2,000.00  units.  For  convenience,  it  is  customary  to  base  the  comparison 
on  even  hundreds  or  thousands  of  dollars. 


332 


CURVED  GRAPH 


§  347.  A  Curved  Graph  is  used  to  present  a  comparison  of  figures  over  a 
number  of  periods.  Assuming  that  the  monthly  sales  and  selling  expense  for 
the  years  192 1  and  1922  are  as  shown  at  the  top  of  page  333,  a  curved  graph  setting 
forth  the  facts  would  appear  as  in   Illustration   No.    143. 


JAN.      FED       MAR.    APR.     MAY     JUNE     JULY      AUG      SEP      OCT.        NOV       DEC. 


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Illustration  No.  143,  Curved  Graph. 

EXPLANATION.  The  curves  at  the  top  show  a  comparison  of  sales  for  the  two  years, 
and  the  curves  at  the  bottom  show  a  comparison  of  the  selling  expense  for  the  two  years.  The 
figures  used  are  given  at  the  top  of  page  333.  The  graph  is  divided  into  fifteen  units,  of  $1,000.00 
each,  each  unit  being  subdivided  into  five  units  of  $200.00  each. 


CIRCULAR  GRAPH 


333 


January. . . 
February. , 

March 

April 

May 

June 

July 

August . .  .  , 
September 
October. . . 
November 
December. 


Sales 


1921 


$  9,000.00 
7,400.00 

11,000.00 
9,000.00 

10,000.00 
8,000.00 
9,000.00 

10,000.00 
8,000.00 
9,000.00 
8,000.00 
8,000.00 


1922 


510,000.00 
11,000.00 
13,000.00 
12,000.00 
10,000.00 
12,000.00 
11,000.00 
12,000.00 
12,000.00 
14,000.00 
12,400.00 
13,000.00 


Selling  Expense 

1921 

1922 

$  1,000.00 

$3,000.00 

500.00 

3,500.00 

2,000.00 

2,400.00 

1,500.00 

2,000.00 

1,000.00 

2,600.00 

2,500.00 

1,200.00 

3,000.00 

1,700.00 

1,400.00 

2,200.00 

900.00 

3,200.00 

1,400.00 

2,400.00 

1,700.00 

2,400.00 

2,600.00 

2,800.00 

§  348.  A  Circular  Graph  is  used  to  present  figures  where  a  comparison  is 
based  on  $1.00  or  100%.  Thus,  when  a  merchant  receives  $1.00  for  merchandise 
sold,  he  knows  that  this  dollar  must  cover  the  cost  of  the  merchandise,  the  selling 
cost,  the  administrative  cost,  and  his  profit,  and  that  each  cost  and  return  is  a  certain 
per  cent  of  the  total  sales.  The  facts  relative  to  sales,  cost  of  sales,  cost  of  buying, 
cost  of  selling,  cost  of  delivering,  cost  of  administration,  and  profit  for  the  two 
fiscal  periods  in  Illustration  No.  139,  when  presented  in  circular  graph  form,  will 
appear  as  in  the  illustration  below. 


1921 


1922 


Costs  and  Profit  in  Eack  One? Dollar  Salo 

Illustration  No.  144,  Circular  Graph. 

EXPLANATION.  Each  of  the  above  circles  represents  a  sale  of  $1.00.  That  part  of  the  dol- 
lar which  was  spent  to  purchase  the  merchandise  sold  is  shown  by  the  shaded  area,  and  the  oper- 
ating expenses  paid  to  effect  this  sale  and  the  profit  remaining  after  all  costs  applicable  to  this  sale 
have  been  paid  are  indicated  by  the  unshaded  portion.  This  information  will  be  valuable  to  the 
management  in  fixing  the  selling  price  of  merchandise  for  the  year  1923.  The  figures  were  obtained 
from  the  comparative  Statement  of  Profit  and  Loss,  Illustration  No.  139;  the  same  facts  for  1922 
expressed  as  percentages  are  shown  in  the  Statement  of  Profit  and  Loss,  Illustration  No.  145. 


334 


PERCENTAGES 


§  349.  Percentages  are  used  to  present  a  comparison  of  figures  and  are 
sometimes  even  more  comprehensive  than  the  graphs  or  the  figures  themselves. 
All  bookkeeping  facts  presented  in  percentage  form  should  be  based  on  net  sales. 
One  reason  for  this  is  that  each  dollar  received  represents  certain  costs  and 
profit,  hence  the  same  base  should  be  used  for  calculating  the  percentage  of  each. 
There  are  many  other  reasons,  but  since  these  are  given  in  connection  with  the 
study  of  percentage,  it  is  not  deemed  necessary  to  repeat  them  here. 

When  percentages  are  used  to  emphasize  facts  on  a  Balance  Sheet  or  State- 
ment of  Profit  and  Loss,  they  are  usually  shown  in  a  separate  column  on  the  re- 
ports. Illustration  No.  145  shows  the  1922  Statement  of  Profit  and  Loss  in  the 
Comparative  Statement,  Illustration  No.  139,  with  the  percentages  based  on  net 
sales  entered  in  the  column  provided  for  them. 


THE  AMERICAN  MERCANTILE  COMPANY 
Statement  of  Profit  and  Loss  for  Year  Ending  December  31,  1922 


Returns  from  Sales: 

Gross  Sales       

Less  Sales  Returns  and  Allowances 


Net  Returns  from  Sales  . 
Cost  of  Goods  Sold: 

Inventory,  January  I,  1922 

Purchases 

Freight  and  Drayage  In. .  . 


Total  Purchases  Cost 

Less  Inventory,  December  31,  1922 

Net  Cost  of  Goods  Sold 


Gross  Profit  on  Sales 
OPER.A.TING  Expenses: 

Buying  Expense 

Selling  Expense 

Delivery  Expense 

Administrative  Expense . . 


Total  Operating  Expenses 


Net  Profit  from  Operations. 
Other  Income: 

Interest  Earned 

Purchases  Discount 


Total  Other  Income 


Gross  Income 

Deductions  from  Income: 

Interest  Cost 

Sales  Discount 


Total  Deductions  from  Income  .  . 
Net  Income  Carried  to  Surplus 


%  of 
Net  Sales 

145000.00 
4000 . 00 

103 
3 

141000.00 

100 

14079.60 
89246 . 40 

14874.40 

10 

63 
10 

118200.40 
18990.40 

83 
13 

99210.00 

70 

41790.00 

30 

6525.00 

13050.00 

8700.00 

4350.00 

32625.00 

5 
9 
6 

3 

* 
23 

9165. 00 

7 

650 . 00 
850.00 

1500.00 

0.4 
0.6 

I 

10665.00 

8 

100.00 

0.1 

1000.00 

1100.00 

0.7 

0.8 

9565.00 

7 

Illustration  No,  145,  Statement  of  Profit  and  Loss  with  Percentages. 

EXPLANATION.  Net  sales  are  taken  as  a  base  and  $100.00  units  used  in  the  calculations. 
A  comparison  of  these  percentages  with  the  circular  graph  in  Illustration  No.  144  will  help  the 
student  to  understand  the  percentages  better.  It  will  be  observed  that  each  $1.00  sale  consists 
of  100  units,  a  certain  number  of  these  units  being  applicable  to  the  various  costs  and  the  profit. 


EXERCISE  335 

Exercise  No.  105,  Comparative  Reports,  Graphs  and  Percentages. 

The  Trial  Balance  of  the  American  Mercantile  Company,  taken  at  the  close 
of  the  fiscal  period,  December  31,  1923,  shows  the  following  account  balances: 
Cash,  Dr.,  $29,819.10;  Notes  Receivable,  Dr.,  $3,800.00;  Accounts  Receivable, 
Dr.,  $36,800.00;  Reserve  for  Doubtful  Accounts  Receivable,  Cr.,  $110.00;  Office 
Equipment,  Dr.,  $1,750.00;  Reserve  for  Depreciation  of  Office  Equipment,  Cr., 
$125.00;  Store  Fixtures,  Dr.,  $4,000.00;  Reserve  for  Depreciation  of  Store  Fixtures, 
Cr.,  $300.00;  Delivery  Equipment,  Dr.,  $4,500.00;  Reserve  for  Depreciation  of 
Delivery  Equipment,  Cr.,  $900.00;  Buildings,  Dr.,  $25,000.00;  Reserve  for  De- 
preciation of  Buildings,  Cr.,  $500.00;  Land,  Dr.,  $15,000.00;  Goodwill,  Dr., 
$15,000.00;  Notes  Payable — Bank,  Cr.,  $5,000.00;  Notes  Payable — Creditors, 
Cr.,  $1,500.00;  Accounts  Payable,  Cr.,  $54,650.00;  Mortgage  Payable,  Cr., 
$10,000.00;  Capital  Stock,  Cr.,  $50,000.00;  Surplus,  Cr.,  $15,489.00;  Sales,  Cr., 
"$207,000.00;  Sales  Returns  and  Allowances,  Dr.,  $3,500.00;  1922  Inventory,  Dr., 
$18,990.40;  Purchases,  Dr.,  $140,000.00;  Freight  and  Drayage  In,  Dr.,  $13,000.00; 
Buying  Expense,  Dr.,  $5,000.00;  Selling  Expense,  Dr.,  $15,864.50;  Delivery  Ex- 
pense, Dr.,  $9,100.00;  Administrative  Expense,  Dr.,  $4,350.00;  Interest  Earned, 
Cr.,  $750.00;  Purchases  Discount,  Cr.,  $1,000.00;  Interest  Cost,  Dr.,  $600.00; 
Sales  Discount,  Dr.,  $1,150.00;    Donations,  Dr.,  $100.00. 

The  following  adjustments  are  to  be  made: 

(a)  Merchandise  Inventory,  December  31,  1923,  $15,754.90. 

(b)  Interest  accrued  on  notes  receivable,  $70.00. 

(c)  Interest  accrued  on  notes  payable,  $60.00.     Unpaid  wages:    Buying  Ex- 

pense, $125.00;    Selling  Expense,  $375.00;    Delivery  Expense,  $75.00; 
Administrative  Expense,  $200.00. 

(d)  Office  supplies  on  hand,  $125.00;    advertising  supplies  on  hand,  $300.00. 

(Debit  one  account  with  Deferred  Charges  to  Operation,  and  credit  the 
expense  accounts  for  these  inventories.) 

(e)  Reserves:     Office    Equipment,    5%;     Store    Fixtures,    7K%;     Delivery 

Equipment,    10%;    Buildings,  2^%;    Doubtful  Accounts  Receivable, 
one  half  of   1%  of  Accounts  Receivable. 
The  student  is  required  to  prepare  the  following: 

1.  Adjusting  entries  for  the  inventories,  accruals,  and  reserves. 

2.  A  Working  Sheet  under  date  of  December  31,  1923. 

3.  A  comparative  Balance  Sheet  and  a  comparative  Statement  of  Profit  and 
Loss  for  1922  and  1923.  The  necessary  facts  are  shown  on  the  Working  Sheet  and 
the  1922  reports  in  Illustrations  Nos.   138  and  139. 

4.  Journal  entries  to  close  the  ledger,  December  31,  1923. 

5.  Post-closing  entries  under  date  of  January  i,   1924. 

6.  A  bar  graph,  similar  in  form  to  Illustration  No.  142,  showing  a  com- 
parison of  net  sales  and  selling  expense  for  the  years  1922  and  1923. 

7.  A  Statement  of  Profit  and  Loss  showing  the  percentages  based  on  net 
sales  as  100%;  drop  fractional  parts  of  $100.00,  using  even  hundreds  of  dollars, 
in  calculating  the  percentages. 

8.  A  circular  graph,  similar  in  form  to  Illustration  No.  144,  showing  the 
proportionate  part  of  a  dollar  applicable  to  the  cost  of  the  merchandise  sold  and 
the  various  operating  expenses;  the  Statement  of  Profit  and  Loss  required  in 
No.  7  may  be  used  as  a  basis  in  preparing  this  graph. 

QUESTIONS  ON  ILLUSTRATIONS  NOS.  138  AND  139- 

1.  What  is  the  increase  in  sales  for  1922? 

2.  What  is  the  increase  in  the  selling  expense  for  1922? 

3.  Is  the  increase  in  sales  in  proportion  to  the  increase  in  the  selling  expense? 

4.  What  is  the  increase  in  cost  of  sales  for  1922? 


336  QUESTIONS 

5.  (a)  Can  you  assign  a  reason  for  the  decrease  in  administrative  expense?     (b) 

For  the  increase  in  deHvery  expense? 

6.  Is  the  increase  in  current  assets  in  proportion  to  the  increase  in  sales? 

7.  Is  the  increase  in  current  HabiHties  in  proportion  to  the  increase  in  purchases? 

8.  Is  the  increase  in  proprietorship  the  same  as  the  increase  in  net  income? 

9.  If  a  part  of  the  income  had  been  withdrawn  in  cash,  what  effect  would  this 

have  on  the  current  liabilities  and   proprietorship? 
10.     If  you  owned  ten  shares  of  stock  in  the  American  Mercantile  Co.,  for  which 
you  had  paid  par,  would  you  regard  this  as  a  good  investment  based  on 
the  facts  shown  by  the  two  reports? 

QUESTIONS  ON  GRAPHS 

1.  Which  form  of  graph  would  be  more  satisfactory  for  setting  forth  in  pictorial 

form  a  comparison  of  sales  for  three  consecutive  years? 

2.  Explain  the  connection  between  the  circular  graph  and  the  percentages. 

3.  Why  are  net  sales  used  as  a  base  for  ascertaining  the  percentage  of  the  costs 

to  the  sales? 

4.  Would  the  percentage  of  buying  expense  be  based  on  total  purchases  or  the 

net  purchases  or  net  sales?     Give  reason  for  answer. 

5.  Why  is  buying  expense  not  included  with  the  purchase  cost  of  merchandise? 

6.  What  effect  would  it  have  on  the  percentage  if  the  cost  of  merchandise  sold 

is  used  as  a  basis? 

7.  Could  a  comparison  of  sales,  cost  of  sales,  cost  of  selling,  and  administrative 

cost  be  shown  on  one  bar  graph?     Explain. 

8.  When  comparing   percentages   for  two  or  more  periods,  would  all    the  per- 

centages be  based  on  the  sales  for  one  period,  or  the  sales  for  each  period? 
Explain, 

9.  Of  what  advantage  to  the  owner  of  the  business  is  a  circular  graph  showing 

the  various  costs  which  enter  into  each  dollar  of  sales  he  receives? 
10.     Of  what  advantage  to  the  owner  of  a  business  is  a  curved  graph  setting  forth 
a  comparison  of  the  sales  by  months  during  two  or  more  years? 


Chapter  XXXV 

CORPORATION  PROBLEMS 

The  Purpose  of  this  Chapter  is  to  give  the  student  an  opportunity  to  apply 
the  principles  discussed  in  the  preceding  chapters  through  the  recording  of  trans- 
actions affecting  the  organization,  operations,  and  dissolution  of  corporations. 
If  the  student  understands  the  principles  governing  corporation  accounting,  he 
will  have  no  trouble  in  making  the  required  entries  to  open  the  corporation  books, 
to  close  a  set  of  corporation  books,  or  to  record  those  transactions  affecting  the 
proprietorship  of   the   corporation. 

Exercise  No.  106,  Opening  Entries. 

May  I,  1923,  a  charter  was  granted  to  C.  W.  Addison,  J.  B.  Chaney,  E.  O. 
Dana,  L.  B.  Simrall,  and  E.  D.  Townsend  for  the  purpose  of  operating  a  canning 
factory.  C.  W.  Addison  and  J.  B.  Chaney  own  land,  buildings,  and  machinery 
which  have  been  used  for  this  purpose  in  the  past,  but  the  operations  have  been 
discontinued.  The  charter  granted  provides  for  a  capital  stock  of  $100,000.00, 
half  of  which  is  common  and  half  preferred,  par  value  $100.00  per  share. 

C.  W.  Addison  and  J.  B.  Chaney  each  subscribe  for  one  hundred  shares  of 
common  and  one  hundred  shares  of  preferred  stock  with  the  understanding  that 
one  half  of  the  subscription  of  each  is  to  be  paid  by  the  corporation's  accepting  the 
land,  buildings,  and  machinery  owned  by  them;  each  is  to  pay  cash  for  the  other 
half  of  his  subscription.  E.  O.  Dana,  L.  B.  Simrall,  and  E.  D.  Townsend  each 
subscribe  for  fifty  shares  of  common  stock,  one  half  of  which  is  to  be  paid  for  in 
cash  and  the  balance  in  two  equal  installments  payable  in  90  and  120  days. 

J.  W.  Wolfe  subscribes  for  one  hundred  shares  of  preferred  stock  with  the 
privilege  of  deducting  a  discount  of  three  per  cent  for  cash.  D.  V.  Beatty  sub- 
scribes for  twenty-five  shares  of  common  and  seventy-five  shares  of  preferred 
stock;  he  is  to  pay  cash  for  the  common  and  the  corporation  is  to  accept  machinery 
valued  at  $3,500.00  and  his  note  for  $4,000.00  in  payment  for  the  preferred.  E. 
Mannix  and  J.  R.  Armleder  each  subscribe  for  twenty-five  shares  of  preferred 
stock  to  be  paid  for  in  cash.  H.  Pearson,  W.  L.  Garber,  and  K.  Ferger  each  sub- 
scribe for  ten  shares  of  preferred  and  fifteen  shares  of  common  stock,  agreeing  to 
pay  cash  for  the  preferred  and  cash  for  one  third  of  the  common,  balance  of  the 
common  to  be  paid  for  in  two  equal  installments  payable  in  sixty  and  ninety  days. 

1.  Prepare  in  journal  form  the  entries  required  to  record  the  authorized 
capital  stock  and  the  subscriptions. 

2.  Make  in  journal  form  the  entries  necessary  to  record  the  cash  and  other 
property  received  in  payment  for  stock  as  per  agreement  at  the  time  the  corpora- 
tion was  organized,  assuming  that  stock  was  issued  when  fully  paid. 

3.  Prepare  in  journal  form  the  entries  when  the  deferred  payments  are  made, 
it  being  assumed  that  D.  V.  Beatty  pays  one-half  of  his  note  and  interest  at  ma- 
turity and  renews  the  other  half  with  an  interest-bearing  note  due  in  ninety  days. 

Exercise  No.  107,  Entry  for  Stock  Sold. 

W.  G.  Darling  subscribed  for  ten  shares  of  the  capital  stock  of  the  Boyd  Manu- 
facturing Co.  at  $100.00  per  share.  He  paid  cash  $250.00  and  gave  his  sixty-day 
note  for  the  balance,  attaching  the  certificate  of  stock  as  collateral  security.  He 
died  before  paying  the  note.  His  estate  was  insolvent  and  the  corporation  settled 
with  the  administrator  by  refunding  one-half  the  amount  Mr.  Darling  had  paid. 

Prepare  in  journal  form  (a)  the  entry  when  the  stock  was  sold  to  Mr.  Darling, 
and  (b)  the  entry  when  settlement  was  made  with  the  administrator. 

*  337 


338 


EXERCISES 


Exercise  No.  108,  Opening  Entries. 

F.  L.  Burke,  R.  S.  Cooke,  and  C.  B.  Summers,  partners  in  a  mercantile  busi- 
ness, wish  to  incorporate  at  the  close  of  business  June  30,  192..  The  Balance 
Sheet  prepared  from  their  books  at  that  time  shows  the  following  facts: 


BURKE,  COOKE  &  SUMMERS 
Balance  Sheet,  June  30,  192.. 


A ssets 
Current  Assets: 

Cash 

Notes  Receivable 

Accounts  Receivable 12,014.00 

Less  Reserve  for  Bad  Debts 248  .60 

Accrued  Interest  Earned 

Merchandise  Inventory,  June  30 

Fixed  Assets: 

Office  Equipment 350  .  00 

Less  Reserve  for  Depreciation 52  •  50 

Store  Fixtures 400 .00 

Less  Reserve  for  Depreciation 16  .00 

Delivery  Equipment 4,100.00 

Less  Reserve  for  Depreciation 480 .00 

Deferred  Charges  to  Operation: 

Office  Supplies  on  hand 

Prepaid  Insurance 

Total  Assets  and  Deferred  Charges 

Liabilities  and  Proprietorship 
Current  Liabilities: 

Notes  Payable 

Accounts  Payable 

Accrued  Interest  Cost 

Proprietorship: 

F.  L.  Burke,  Capital 

R.  S.  Cooke,  Capital 

C.  B.  Summers,  Capital 

Total  Liabilities  and  Proprietorship 


6,011 
1,000 

11,765 

9 

2,500 


297 

384 
3,620 


500 

1.327 

15 


8,037 
7,956 
7,860 


21,286 


4,301 


108 


25,697 


1,842 


23,854 


25,697 


60 


50 


90 


60 


40 


The  three  partners  sign  application  for  a  charter  of  incorporation  with  a 
capital  stock  of  $50,000.00,  consisting  of  one  thousand  shares  at  $50.00  a  share. 
F.  L.  Burke  subscribes  for  250  shares;  R.  S.  Cooke,  200  shares;  C.  B.  Summers, 
200  shares;  R.  H.  Porter,  100  shares;  J.  G.  Winkler,  50  shares;  W.  G.  Brownfield, 
50  shares;   J.  C.  Walters,  50  shares;    the  remaining  100  shares  will  be  sold  later. 

Each  partner  is  to  receive  180  shares  for  his  interest  in  the  business  and  pays 
cash  for  the  balance  of  his  subscription.  The  corporation  accepts  from  R.  H. 
Porter  two  trucks  which  he  has  been  using  in  a  similar  business  operated  by  him- 
self, valued  at  $4,000.00;  he  pays  cash  for  the  balance  of  his  subscription.  All 
other  subscribers  pay  cash  for  their  subscriptions. 

The  difference  between  the  par  value  of  the  stock  accepted  by  the  partners 
in  payment  for  their  interest  in  the  business  and  the  proprietorship  of  the  three 
partners,  is  to  be  regarded  as  goodwill. 

Prepare  in  journal  form  the  entries  (a)  to  close  the  partnership  books,  and 
(b)  to  open  the  corporation  books. 


CORPORATION  PROBLEMS  339 

Exercise  No.  109,  Transactions  witli  a  Delinquent  Subscriber. 

Record  the  following  transactions  in  journal   form: 
May    5.     C.  W.  Green  subscribed  for  fifteen  shares  of  Peoples  Telephone  Co. 
stock  at  $50.00  per  share,  payable  within  ten  days. 
9.     Received  from  C.  W.  Green  $100.00  on  account  of  stock  subscription. 
25.     Brought  suit  against  C.  W.  Green  for  $650.00,  balance  due  on  stock 
subscription. 
June     5.     Court  rendered  a  judgment  against  C.  W.  Green  for  $687.96,  covering 
the  amount  of  his  indebtedness,  $650.00,  court  costs,  $26.40,  and 
interest  on  his  account,  $11.56.'    Gave  the  court  a  check  for  $26.40 
in  payment  for  costs. 

20.  Received  from  the  court  a  chetk  for  $687.96,  amount  of  the  judgment 

rendered  against  C.  W.  Green. 
Issued  fifteen  shares  of  stock  to  C.  W.  Green. 

21.  Gave  A.  Y.  Burris,  attorney,  a  check  for  $33.08,  five  per  cent  collection 

fee  for  collecting  the  account  against  C.  W.  Green. 

Exercise  No.  110,  Donated  Stock. 

January  i,  1923,  the  Mercantile  Trading  Company,  a  corporation  with  a 
capital  stock  of  $500,000.00,  of  which  $250,000.00  is  common  and  $250,000.00 
preferred,  finds  that  it  can  not  pay  maturing  obligations  and  that  it  will  be  necessary 
to  make  an  assignment  unless  cash  can  be  secured.  All  the  common  and  preferred 
stock  has  been  sold,  hence  additional  capital  can  not  be  secured  through  the  sale 
of  stock  without  the  legal  formalities  of  having  the  capital  stock  increased,  which 
would  require  more  time  than  is  available.  A  meeting  of  the  stockholders  is  called 
to  decide  the  future  policy  of  the  corporation.  At  this  meeting  it  is  agreed  that 
each  stockholder  will  donate  to  the  corporation  approximately  one  fifth  of  the 
common  stock  which  he  owns;  this  stock  is  to  be  sold  for  cash.  It  is  decided  that 
it  will  be  better  for  the  stockholders  to  sacrifice  a  part  of  their  holdings  in  order 
to  tide  the  business  over  its  present  financial  embarrassment  than  to  take  the 
chance  of  losing  more  heavily  through  the  creditors  asking  for  a  receiver  to  take 
charge  of  the  affairs  of  the  business. 

Jan.      5.     $50,000.00  of  the  common  stock  was  received  from  the  stockholders  as 
per  agreement  of  the  ist;    this  stock  was  donated  to  the  corporation. 

6.  Transferred  $10,000.00  of  this  common  stock  to  the  First  National  Bank 

to  apply  as  part  payment  on  a  note  for  $10,000.00  due  today;    the 
bank  accepts  the  stock  at  .90. 

7.  Received  $26,500.00  cash  in  payment  for  300  shares  (par  value,  $100.00) 

of  the  donated   common  stock. 

8.  Paid  Anderson  Bros.  $4,250.75,  balance  due  them,  with  30  shares  of 

donated  common  stock  at  .85  and  check  for  the  balance. 

1.  Record  in  journal  form  the  foregoing  transactions  and  post  to  ledger 
accounts,  allowing  five  lines  for  each  account. 

2.  Assuming  that  the  net  proprietorship  of  the  corporation  at  the  close  of 
the  next  business  year  is  $605,000.75,  indicate  the  form  in  which  this  would  be 
shown  on  the  Balance  Sheet. 

Exercise  No.  Ill,  Organization  of  and  Opening  Entries  for  a  Corporation. 

The  Roberts  Printing  Co.  is  incorporated  in  the  state  of  New  York.  The 
incorporators  are  A.  L.  Roberts,  H.  B.  Boyles,  V.  W.  Boyles,  T.  E.  Robbins,  and 
A.  J.  Smith.  The  corporation  has  an  authorized  capital  stock  of  $250,000.00, 
par  value  $100.00  per  share.  Subscriptions  for  this  stock  are  as  follows:  A.  L. 
Roberts,  $75,000.00;  H.  B.  Boyles,  $35,000.00;  V.  W.  Boyles,  $35,000.00;  T.  E. 
Robbins,  $10,000.00;    A.  J.  Smith,  $12,500.00;    S.  P.  Benham,  $5,000.00;    L.  M. 


340 


CORPORATION  PROBLEMS 


Wiley,  $2,500.00;  and  M.  J.  Coleman,  $25,000.00.    It  is  decided  to  hold  $50,000.00 
of  the  capital  stock  for  future  use.     All  subscriptions  are  paid  in  cash. 

A.  L.  Roberts,  the  promoter  of  the  corporation,  obtained  the  subscriptions 
and  attended  to  the  details  of  the  incorporation.  The  corporation  is  to  engage 
in  the  printing  and  publishing  business  in  the  city  of  Albany,  New  York. 

1.  Show  in  outline  form  each  step  involved,  from  the  time  Mr.  Roberts 
conceived  the  organization  of  this  business  until  the  corporation  is  ready  to  begin 
business  operations. 

2.  Prepare  the  charter,  taking  into  consideration  the  conditions  required  in 
the  New  York  law  and  the  form  of  charter  in  Chapter  XXV, 

3.  Show  in  journal  form  the  opening  entries. 


Exercise  No.  112,  Changing  a  Partnership  to  a  Corporation.     '    . 

Smiley,  Winters  &  French,  partners,  agree  to  incorporate  at  the  close  of  the 
business  year,  June  30,  1922.    A  Balance  Sheet  prepared  at  this  time  is  as  follows: 

SMILEY,  WINTERS  &  FRENCH 
Balance  Sheet,  June  30,  192.  . 


Assets 
Current  Assets: 

Cash 

Accounts  Receivable 236  .52 

Less  Reserve  for  Bad  Debts 50.85 

Inventory — Drugs 

Inventory — Merchandise 

Inventory — Soda  Fountain  SuppHes •.  .  .  . 

Fixed  Assets: 

Office  Equipment 300 .  00 

Less  Reserve  for  Depreciation 42  ■  50 

Store  Fixtures I119  .50 

Less  Reserve  for  Depreciation 167  .93 

Soda  Fountain  Equipment 650  .00 

Less  Reserve  for  Depreciation 48  .75 

Building 9000  .00 

Less  Reserve  for  Depreciation 300  ,00 

Land 

Deferred  Charges  to  Operation: 

Office  Supplies 

Advertising  Material 

Insurance  Unexpired 

Total  Assets  and  Deferred  Charges 

Liabilities  and  Proprietorship 
Current  Liabilities: 

Notes  Payable 

Accounts  Payable 

Accrued  Interest  Cost 

Accrued  Wages 

Fixed  Liability: 

Five- Year  Mortgage 

Proprietorship: 

S.  M.  Smiley,  Capital 

D.  P.  Winters,  Capital 

L.  S.  French,  Capital 

Total  Liabilities  and  Proprietorship 


12412 

185 

255^ 

1008 

182 


257 

951 

601 

870c 
5000 


II 

5^ 
237 


250C 

4186 

144 

56 


9479 
2946 
2946 


16343 


24 


15510 


405 


322"^? 


1 537 1 


322  ,s8 


32 


26 


52 


78 


CORPORATION  PROBLEMS  341 

The  capital  stock  of  the  corporation  is  to  be  $25,000.00,  consisting  of  five 
hundred  shares  at  $50.00  per  share.  The  subscriptions  at  the  time  the  charter  is 
granted  July  i  are  as  follows:  D.  P.  Winters,  100  shares;  L.  S.  French,  100  shares; 
S.  M.  Smiley,  100  shares;  A.  L.  Frost,  50  shares;  E.  D.  Carpenter,  50  shares; 
and  C.  C.  Lowrey,  50  shares.  The  corporation  agrees  to  pay  the  partners  $15,000.00 
for  their  interest  in  the  partnership,  taking  over  all  the  assets  and  assuming  all  the 
liabilities.  Each  partner  is  to  pay  cash  for  the  stock  subscribed  for  by  him  and  to 
receive  cash  for  95  per  cent  of  his  proprietary  interest  in  the  business  as  shown  by 
the  Balance  Sheet;  the  remaining  five  per  cent  is  to  constitute  a  surplus  to  take 
care  of  possible  loss  resulting  from  taking  over  the  assets  of  the  partnership.  The 
other  subscribers  pay  cash  for  their  subscriptions. 

1.  Prepare  in  journal  form  the  entries  necessary  to  close  the  books  of  the 
partnership. 

2.  Make  in  journal  form  the  entries  necessary  to  open  the  books  of  the  cor- 
poration, taking  into  consideration  the  conditions  mentioned. 

If  desired,  the  student  may  show  the  cash  paid  to  the  partners  for  their  interest  in  the  business 
and  the  cash  received  from  them  by  the  corporation  for  the  stock  subscribed,  though  in  practice 
only  the  difference  would  be  paid  to  or  received  by  the  corporation,  as  it  does  not  buy  the  cash  be- 
longing to  the  partnership. 

Exercise  No.  113,  Distribution  of  Profit. 

The  Union  Grocery  Company  is  incorporated  with  a  capital  stock  of  $200,000.00 
— $100,000.00  preferred,  and  $100,000.00  common;  $90,000.00  of  the  preferred 
and  $85,000.00  of  the  common  has  been  issued.  The  preferred  stock  pays  a  dividend 
of  eight  per  cent.  The  Surplus  account  at  the  close  of  the  fiscal  period,  December 
31,  1922,  shows  a  balance  of  $22,500.00.  It  is  decided  to  declare  a  dividend  of 
eight  per  cent  on  the  outstanding  preferred  stock  and  ten  per  cent  on  the  out- 
standing common  stock,  and  to  transfer  to  a  Sinking  Fund  Reserve  account  $5,000.00 
to  provide  for  bonds  which  will  mature  in  the  future. 

Make  in  journal  form  the  entries  necessary  to  record  the  dividends  and  the 
sinking  fund  reserve. 

Exercise  No.  114,  Stock  Dividend. 

At  the  close  of  business  December  31,  192.  . ,  the  Capital  Stock  account  of  the 
Consolidated  Manufacturing  Co.  shows  a  credit  balance  of  $300,000.00,  and  the 
Unissued  Capital  Stock  account,  a  debit  balance  of  $100,000.00;  the  Surplus 
account  shows  a  credit  balance  of  $162,500.00.  The  board  of  directors  decides  to 
declare  a  cash  dividend  of  ten  per  cent  and  a  stock  dividend  of  fifty  per  cent  of  the 
outstanding  stock. 

Make  in  journal  form  the  entries  necessary  to  record  these  dividends. 

Stock  dividend  refers  to  capital  stock  issued  to  the  stockholders  for  a  part  of  their  interest  in 
the  surplus.    The  value  of  this  stock  is  debited  to  the  Surplus  account. 

Exercise  No.  115,  Changing  from  a  Corporation  to  a  Sole  Proprietorship. 

The  Peoples  Trading  Co.  is  incorporated  with  a  capital  stock  of  $25,000.00, 
consisting  of  5,000  shares,  par  value  $5.00  each.  Four  thousand  shares  are  owned 
by  C.  H.  Love,  the  other  one  thousand  being  owned  by  various  stockholders. 
Mr.  Love  decides  to  change  the  business  from  a  corporation  to  a  sole  proprietor- 
ship and  calls  a  meeting  of  the  stockholders  for  this  purpose.  Holding  more  than 
fifty  per  cent  of  the  stock,  he  votes  a  majority  for  cancellation  of  the  charter  and 
his  attorney  complies  with  the  necessary  legal  requirements.  December  10,  when 
notice  is  received  that  the  charter  has  been  canceled,  the  Balance  Sheet  of  the 
corporation  is  as  shown  at  the  top  of  page  342. 


342 


CORPORATION  PROBLEMS 


THE  PEOPLES  TRADING  COMPANY 
Balance  Sheet,  December  10,  192.. 


A ssets 
Current  Assets: 

Cash  in  Bank 

Office  Cash  Fund 

Notes  Receivable 1 1  lO  .oo 

Less  Notes  Receivable  Discounted 55  .00 

Accounts  Receivable ., 9845  .20 

Less  Reserve  for  Doubtful  Accounts 104.16 

Mdse.  Inventory,  December  10,  192 

Accrued  Interest  on  Notes  Receivable 

Fixed  Assets: 

Office  Equipment 450 .  00 

Less  Reserve  for  Depreciation 45-00 

Store  Fixtures 1 539  .  60 

Less  Reserve  for  Depreciation 307 .92 

Delivery  Equipment 2400  .00 

Less  Reserve  for  Depreciation 720 .00 

Buildings 8000.00 

Less  Reserve  for  Depreciation 640 .00 

Land 

Goodwill 

Deferred  Charges  to  Operation: 

Office  Supplies 

Advertising  Material 

Warehouse  Supplies. 

Prepaid  Insurance 

Total  Assets  and  Deferred  Charges 

Liabilities  and  Proprietorship 
Current  Liabilities: 

Notes  Payable — Bank 

Notes  Payable — Trade  Creditors 

Accounts  Payable 

Accrued  Interest  on  Notes  Payable 

Accrued  Wages 

Proprietorship: 

Capital  Stock  Issued  and  Outstanding 

Surplus 

Total  Liabilities  and  Proprietorship 


19430 

15 

100 

00 

1055 

00 

9741 

04 

3236.96 

10 

00 

33573 

15 

405 

00 

I23I 

68 

1680 

00 

7360 

00 

4500 

00 

15176 
6049 

68 

18 

125 

00 

344 

50 

218 

94 

114 

12 

802 

56 

55601 

_57 

6000 

00 

1637 

42 

4691 

17 

90 

00 

392 

50 

12811 

09 

25000 

00 

17790.48 

42790.48 

55601 

_57 

A.  L.  Peters,  one  of  the  incorporators,  who  holds  twenty  shares  of  stock,  owes 
the  corporation  an  account  of  $110.00;  Mr.  Love  cancels  this  account  upon  sur- 
render of  the  certificate  of  stock.  J.  L.  Browning,  another  stockholder,  who  holds 
forty  shares  of  stock,  owes  the  corporation  a  note  for  $200.00  on  which  $10.00 
interest  has  accrued;  Mr.  Love  accepts  his  stock  at  $5.50  per  share  and  his  check 
for  the  balance  in  settlement  of  the  note  and  interest.  The  other  stockholders 
accept  cash  at  $5.50  per  share  for  their  stock. 

1.  Make  the  journal  entries  necessary  to  record  the  change  from  a  corporation 
to  an   individual   proprietorship, 

2.  Make  in  journal  form  the  entries  necessary  to  record  the  cancellation  of 
stock  owned  by  outside  stockholders. 


CORPORATION  PROBLEMS 


343 


Exercise  No.  116,  Reduction  of  Capital  Stock. 

The  Davis  Printing  Co.  is  incorporated  with  a  capital  stock  of  $50,000.00, 
consisting  of  five  hundred  shares,  par  value  $100.00  each.  At  the  close  of  the  fiscal 
period  December  31,  192..,  C.  U.  Davis,  who  holds  $10,000.00  worth  of  stock, 
wishes  to  retire  from  the  business  and  agrees  to  accept  $8,000.00  for  his  stock. 
The  remaining  stockholders  accepted  his  proposition  and  the  corporation's  check 
was  issued  for  $8,000.00  in  payment  for  this  stock.  It  is  decided  at  the  annual 
meeting  of  the  stockholders  held  January  2,  to  reduce  the  capital  stock  from 
$50,000.00  to  $40,000.00  and  the  corporation's  attorney  is  instructed  to  prepare 
the  necessary  legal  papers.  January  10  the  attorney  advises  that  an  amended 
charter  has  been  granted,  reducing  the  capital  from  $50,000.00  to  $40,000.00. 

Record  in  journal  form  the  purchase  of  stock  from  C.  U.  Davis,  and  the  re- 
duction of  capital  stock  on  January  10. 

Exercise  No.  117,  Changing  from  a  Corporation  to  a  Partnership. 

THE  H.  R.  JUDSON  CORPORATION 
Balance  Sheet,  October  31,  192.. 


A ssets 
Current  Assets: 

Cash 

Notes  Receivable 

Accounts  Receivable 29709 .42 

Less  Reserve  for  Doubtful  Accounts 298  .10 


Mdse.  Inventory,  October  31,  192 

Branch  Store  Inventory,  October  31,  192 
Accrued  Interest  Earned 


Total  Current  Assets. 


Fixed  Assets: 

Office  Equipment 600  .  00 

Less  Reserve  for  Depreciation 50.00 


Store  Fixtures 1450.00 

Less  Reserve  for  Depreciation 185  .00 


Total  Fixed  Assets . 


Deferred  Charges  to  Operation: 

Office  Supplies 

Unexpired  Insurance 


Total  Deferred  Charges  to  Operation . 
Total  Assets  and  Deferred  Charges 


Liabilities  and  Proprietorship 
Current  Liabilities: 

Notes  Payable 

Accounts  Payable ...:.... 

Accrued  Rent 

Accrued  Wages 


Total  Current  Liabilities. 

Proprietorship: 

Capital  Stock  Issued  and  Outstanding. 
Surplus 


Total  Proprietorship 

Total  Liabilities  and  Proprietorship. 


19580.71 

2725 -45 

29411 .32 

15273.90 

4692 . 86 

24  65 


550.00 
1265 .00 


253.60 
85.00 


7000.00 

9186.42 

300.00 

649.60 


50000 . 00 
6726.47 


71708.89 


1815 .00 


338.60 


73862.49 


17136.02 


56726.47 


73862.49 


344  CORPORATION  PROBLEMS 

The  capital  stock  of  the  H.  R.  Judson  Corporation  consists  of  500  shares  of 
stock,  par  value  $100.00,  owned  by  the  following:  F.  A.  McArthur,  100  shares; 
D.  W.  Stokes,  50  shares;  J.  K.  Kincaid,  75  shares;  E.  P.  Ramey,  25  shares;  C.  M. 
Derrick,  50  shares;  C.  Vance,  40  shares;  J.  J.  Nolan,  50  shares;  H.  S.  Gordon, 
35  shares;  Roy  Sheldon,  15  shares;  E.  Westover,  60  shares.  At  the  annual  meeting 
of  the  stockholders  October  31,  it  is  agreed  to  dissolve  the  corporation;  the  proper 
legal  steps  are  taken  and  the  charter  is  canceled.  The  first  four  stockholders  decide 
to  continue  the  operation  of  the  business  as  a  partnership.  All  of  the  stockholders 
are  to  accept  $125.00  per  share  in  settlement  for  their  stock,  the  retiring  stock- 
holders to  be  paid  in  cash.  The  diiTerence  between  the  purchase  price  of  the  stock 
and  the  capital  and  surplus  is  to  be  treated  as  goodwill.  Each  of  the  four  partners 
invests  $7,500.00  in  cash  in  addition  to 'his  interest  in  the  assets  as  shown  by  the 
number  of  shares  he  owns  in  the  corporation. 

Make  in  journal  form  the  entries  for  (a)  the  transfer  of  the  assets  and  lia- 
bilities of  the  corporation  to  the  partnership;    (b)   the  additional  investment  of 
the  four  partners;    and  (c)  the  transactions  with  the  retiring  stockholders. 
Exercise  No.  118,  Entries  for  Donated  Stock. 
May  10  the  stockholders  of  the  Adams  Manufacturing  Co.  donated  $20,000.00 
(200  shares)  of  common  stock  and  $10,000.00  (100  shares)  of  preferred  stock  to 
the  corporation  to  be  sold  by  it  to  meet  maturing  obligations. 
May  15.     Gave  the  A.  L.  Crim  Company  a  check  for  $2,500.00,  25  shares  of 
donated  preferred  stock,  and  50  shares  of  donated  common  stock, 
in  settlement  for  a  past-due  account  amounting  to  $8,750.00.     Pre- 
ferred stock  is  accepted  by  him  at  $90.00  and  common  stock  at  $80.00. 
16.     Received  cash  for  a  sale  of  50  shares  of  donated  common  stock  at  $77.50. 
20.     Received  cash  for  a  sale  of  40  shares  of  donated  preferred  stock  at 

$86.25. 
30.     Received  cash  for  a  sale  of  50  shares  of  donated  common  stock  at  $77.25 
and  30  shares  of  donated  preferred  at  $86.20. 
June  25.     Sold  40  shares  of  donated  common  stock  at  $91.40. 

1.  Record  these  transactions  in  journal  form. 

2.  Post  to  ledger  accounts. 

3.  Indicate  on  journal  paper  the  method  of  showing  the  proprietorship  on  the 
Balance  Sheet  prepared  under  date  of  December  31,  assuming  that  the  authorized 
common  stock  is  $250,000.00  and  the  authorized  preferred  stock,  $250,000.00, 
with  $200,000.00  of  each  subscribed  and  paid  for,  and  that  the  Surplus  account 
shows  a  credit  balance  of  $16,408.50. 

Exercise  No.  119,  Treasury  Stock. 

January  7  the  Arnold  Shoe  Company  sold  for  cash  to  H.  F.  Ritter,  one  of  its 
traveling  salesmen,  ten  shares  (par  value,  $100.00)  of  capital  stock  at  $113.00, 
with  the  understanding  that  the  corporation  would  buy  the  stock  back  at  any 
time  he  wished  to  discontinue  his  connection  with  the  corporation.  He  paid 
$500.00  cash,  the  balance  to  be  deducted  from  his  commission  at  the  end  of  the 
year.     With  this  agreement,  the  stock  was  issued. 

October  5  H.  F.  Ritter  surrendered  half  of  his  stock  at  $iii.00  and  received 
credit  on  his  account  for  this  amount,  less  six  per  cent  interest  on  the  amount  of 
his  indebtedness  from  the  date  he  purchased  the  stock. 

December  31  H.  F.  Ritter  was  credited  with  $216.50,  commission  on  sales. 

January  5  the  company  paid  H.  F.  Ritter  $200.00  cash  on  account  of  com- 
mission. 

March  i  the  company  gave  H.  F.  Ritter  a  check  for  balance  due  him  on  ac- 
count and  for  his  five  shares  of  stock  at  $110.00. 

Record  these  transactions  in  journal  form.  An  account  with  Premium  on 
Capital  Stock  will  show  a  record  of  the  amounts  received  and  paid  in  excess  of  the 
par  value. 


Chapter  XXXVI 

VOUCHER  ACCOUNTING  AND  CASH  JOURNAL 

The  Purpose  of  this  Chapter  is  to  explain  (a)  the  voucher  system  of  ac- 
counting and  (b)  the  cash  journal.  Many  business  concerns  require  a  voucher 
for  each  cash  payment;  hence,  the  student  of  bookkeeping  should  be  familiar  with 
the  method  of-  issuing  the  vouchers  and  the  checks  given  in  payment  of  them. 
The  cash  journal  is  very  popular  with  practicing  bookkeepers,  because  of  the  time 
saved  in  proving  cash  and  posting. 

§  350.  The  Voucher  is  a  written  statement,  usually  prepared  on  a  printed 
form,  containing  detailed  information  regarding  a  purchase  of  merchandise,  material 
or  service;  receipts  and  canceled  checks  are  sometimes  referred  to  as  vouchers. 
A  voucher  is  prepared  for  each  purchase  of  merchandise  or  material  at  the  time 
the  purchase  is  made,  and  for  labor  or  other  service  at  the  time  payment  is  made. 
The  blank  forms  prepared  for  vouchers  are  usually  printed  on  both  sides;  full 
information  in  regard  to  the  obligation  is  given  on  one  side,  and  the  accounts 
affected  are  indicated  on  the  other  side.  The  voucher  may  be  sent  with  the  check 
for  receipt  or  it  may  be  folded  and  the  canceled  check  filed  with  it.  Since  it  is 
not  always  possible  to  secure  return  of  the  voucher  sent  with  the  check,  even 
when  it  is  accompanied  by  a  stamped  return  envelope,  it  is  customary  to  retain 
the  voucher  in  the  office  and  file  the  canceled  check  with  it;    this  form  of  voucher 


VOUCHER  JACKET 

COWDEN  BUICK  COMPANY 


No. 


22 


Date  of  Issue- 


May  13. 


-19- 


Date  Due- 


Jvjie   1. 


In  Account  with- 
Address 


Fl3k  Tire  Company. 


816  Main  Street.  City. 


-for  the  following: 


Invoice  Date 

DESCRIPTION 

Amount 

Kay 

12 

4 

31  X  4  Cord  Tires.    Type   S.    S. 

16.45 

75 

80 

2 

31  X  4  Fabric    "               "      01. 

12.90 

25 

80 

1 

33  X  4  Cord        "               "    -S.    S. 

21 

25 

IE 

31  X  4  Cord  Tubes 

2.15 

25 

80 

18 

31  X  4  Fabric    " 

1.95 

23 

40 

5 

32  X  4  Cord 

2.85 

6 

75 

8 

35  X  4 

2.35 

18 

80 

6 

34  X   4  "     " 

2.50 

15   00 

210   60 

^/r.c/?  (Z,.,..^, 


^M 


jy,^.  Ga^-cu^^^^jl^ 


Illustration  No.  146,  Inside  of  Voucher  or  V^oucher  Jacket. 

EXPLANATION.     This   voucher  jacket   was   prepared   for  an   invoice   of  tires  and    tubes 
for  which  payment  is  to  be  made  according  to  the  terms  of  the  invoice  as  shown  on  the  voucher. 

345 


346 


VOUCHER  SYSTEM 


is  sometimes  referred  to  as  a  "voucher  jacket"  because  the  voucher  is  folded  and 
the  check  placed  inside.  The  number  of  the  voucher  is  indicated  on  the  check 
so  that  the  auditor  may  know  the  voucher  to  which  it  is  applicable.  Illustrations 
Nos.  146  and  147  show  one  of  the  vouchers  required  in  the  garage  business  illus- 
trated in  the  practice  set  separate  from  the  text. 

Formerly  it  was  the  custom  to  print  the  check  and  voucher  on  the  same  form  so  that  the  one 
who  received  it  would  be  sure  to  return  the  voucher  with  his  receipt.  This  practice  is  not  followed 
so  extensively  at  present  because  of  the  confidential  information  usually  contained  in  the  voucher 
and  the  inconvenience  to  the  bank  clerks  in  handling  large  voucher  checks. 

§  351.  The  Voucher  System  of  Recording  Purchases.  It  is  necessary 
for  every  business  to  make  purchases  of  merchandise,  material  and  s.ervice.  Where 
the  operations  of  the  business  are  limited'  to  a  few  transactions  of  this  nature,  the 
management  can  personally  supervise  the  expenditures;  but,  where  the  trans- 
actions are  numerous  and  performed  by  subordinates,  it  is  necessary  to  provide  a 
control  over  the  expenditures.  One  of  the  best  methods  devised  is  to  require  a 
voucher  for  each  purchase. 

The  voucher  prepared  for  each  purchase  is  usually  signed  by  at  least  two 
individuals,  (a)  the  one  authorized  to  make  the  purchase  and  (b)  the  one  who 
verifies  the  merchandise,  material  or  service  purchased,  described  in  the  voucher. 
Each  voucher  is  numbered  consecutively  and,  after  it  has  been  paid,  is  filed  in 
the  order  of  the  number;  vouchers  issued  for  future  payments  should  be  filed 
under  the  due  date  to  insure  payment  when  due.  Each  voucher  is  recorded  in 
the  voucher  payable  register  at  the  time  it  is  issued. 

There  is  in  reality  no  voucher  method  of  keeping  books,  but  the  use  of  vouchers  in  connection 
with  purchases  is  sometimes  referred  to  as  the  "voucher  method"  or  "voucher  system."  When  the 
so-called  "voucher  system"  is  used,  all  purchases,  either  for  cash  or  on  account,  are  recorded  in  the 
voucher  payable  register  from  the  information  given  on  the  voucher;  this  permits  the  proper  dis- 
tribution in  one  book  of  original  entry  and  thus  avoids  duplication  of  special  columns  where  pur- 
chases on  account  are  recorded  in  one  book  and  cash  purchases  in  another. 


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Illustration  No.  147,  Outside  of  Voucher  or  Voucher  Jacket. 

EXPLANATION.     The  accounts  affected  by  the  purchase  described  on  the  inside  of  the 
voucher  are  indicated  by  entering  the  amounts  on  the  line  with  the  name  of  the  account. 


VOUCHER  PAYABLE  REGISTER  347 

§  352.  The  Voucher  Payable  Register  is  a  book  of  original  entry  ruled 
to  contain  a  record  of  each  voucher  issued.  The  ruling  provides  columns  for  all 
the  information  written  on  the  voucher  so  that  the  record  of  each  voucher  may 
be  made  on  one  horizontal  line.  When  the  voucher  method  of  bookkeeping  is 
used,  it  is  not  customary  to  open  accounts  with  those  from  whom  merchandise, 
material,  or  service  is  purchased,  but  to  record  all  obligations  for  purchases  in 
the  Vouchers  Payable  account.  The  method  of  making  the  record  is  further  ex- 
plained in  connection  with  Illustration  No.  148. 

§  353.  The  Cash  Journal  is  a  combination  of  the  cash  book  and  the  general 
journal;  if  desired,  the  purchases  journal,  sales  journal,  notes  receivable  journal, 
and  notes  payable  journal  may  also  be  combined  in  the  cash  journal.  The  purpose 
of  the  cash  journal  is  to  save  time  in  proving  cash  and  posting,  and  to  avoid  a 
repetition  of  special  columns  in  the  books  of  original  entry.  When  transactions 
of  similar  nature  occur  frequently,  it  is  better  to  record  them  in  a  special  journal 
and  transfer  the  totals  only  to  the  cash  journal,  daily,  weekly,  or  monthly.  Il- 
lustration No.  149  shows  a  cash  journal  with  fifteen  amount  columns,  containing  a 
record  of  part  of  the  transactions  in  the  practice  set  (garage  business)  which  is  sepa- 
rate from  the  text.     The  following  discussion  explains  the  various  columns. 

1.  Merchants  National  Bank.  The  title  of  these  two  columns  indicates  that 
all  cash  received  is  deposited  in  the  bank  and  all  cash  payments  made  by  check. 
If  a  part  of  the  currency  received  is  used  for  cash  payments,  additional  columns 
for  "Cash,  Dr."  and  "Cash,  Cr."  would  be  necessary.  The  balance  at  the  begin- 
ning of  the  month  is  entered  in  the  "Name  of  Account"  column  because  the  total 
of  the  "Bank,  Dr."  column  is  posted  to  the  account  with  the  bank  in  the  general 
ledger  and  this  account  already  shows  the  cash  balance. 

The  cash  received  in  each  transaction  is  entered  in  the  Bank  Dr.  column 
and  the  credit  indicated  by  the  entry  in  the  column  or  columns  at  the  right.  The 
amount  of  each  check  issued  is  entered  in  the  Bank  Cr.  column  and  the  debit 
indicated  by  the  entry  in  the  Vouchers  Payable  column  at  the  right.  The  differ- 
ence between  the  total  of  the  Bank  Dr.  column  plus  the  balance  on  hand  at  the 
beginning  of  the  month,  and  the  total  of  the  Bank  Cr.  column  should  be  the 
balance  of  the  cash  in  the  bank  as  shown  by  the  check  stub,  or  in  the  bank  and 
on  hand.  To  prove  cash  it  is  not  necessary  to  add  all  the  columns  of  the  cash 
journal  but  it  is  customary  to  do  so  because  the  credits  and  debits  for  the  cash 
received  and  paid  are  entered  in  these  columns  and  the  proving  of  cash  also  proves 
their  correctness.  The  method  of  proving  is  illustrated  by  the  small  figures  in 
Illustration  No.  149. 

2.  General  Ledger.  Two  columns  are  provided,  one  for  debits  and  the  other 
for  credits.  Only  those  amounts  affecting  accounts  for  which  special  columns 
are  not  provided  are  entered  in  these  columns;  where  transactions  affecting  one 
account  are  of  sufficient  frequency,  a  special  column  is  provided. 

3.  Accounts  Receivable  Ledger.  Two  columns  are  provided  for  the  Accounts 
Receivable  account  in  the  general  ledger  because  the  transactions  with  customers 
are  of  sufficient  frequency  to  require  the  use  of  these  columns.  When  a  trans- 
action affects  the  debit  of  an  account  with  a  customer,  the  amount  is  recorded  in 
the  "Accounts  Receivable,  Dr."  column,  and  when  a  transaction  affects  the  credit 
of  an  account  with  a  customer,  the  amount  is  recorded  in  the  "Accounts  Receiv- 
able, Cr."  column;  the  name  of  the  customer  is  written  in  the  "Name  of  Account" 
column.  When  transactions  affecting  the  accounts  with  customers  are  of  frequent 
occurrence,  it  is  advisable  to  record  the  debits  and  credits  each  in  a  special  jour- 
nal and  transfer  the  total  to  the  cash  journal  for  posting. 

The  cash  journal  is  popular  with  bookkeepers  because  of  the  time  saved  in  recording  transac- 
tions, but  it  is  not  so  popular  with  auditors  because  of  the  difficulty  of  auditing  the  transactions 
recorded  in  it.  Perhaps  one  reason  for  this  difficulty  in  auditing  is  the  recording  of  more  than  one 
transaction  on  one  horizontal  line.  If  the  bookkeeper  will  record  each  transaction  on  a  separate 
line  and  explain  it,  the  difficulty  of  auditing  the  cash  journal  will  be  eliminated. 


348 


CASH  JOURNAL 


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Illustration  No.  148,  Left  Page  of  Voucher  Payable  Register. 

EXPLANATION.  The  ruling  provides  columns  for  all  the  information  written  on  each 
voucher,  thus  permitting  the  record  to  be  made  on  one  horizontal  line.  The  amount  of  each 
voucher  is  entered  in  the  "Vouchers  Payable,  Cr."  column  and  in  the  column  or  columns  which 
show  the  account  or  accounts  debited.  At  the  end  of  the  month  the  Vouchers  Payable  account  in 
the  general  ledger  is  credited  with  the  total  vouchers  issued  during  the  month. 

4.  Votichers  Payable.  A  debit  column  only  is  provided  for  Vouchers  Payable 
because  the  credits  to  this  account  in  the  general  ledger  are  posted  from  the  voucher 
payable  register.  If  it  is  desired  to  post  all  transactions  from  the  cash  journal, 
transferring  the  totals  from  the  voucher  payable  register  either  daily  or  weekly,  it 
will  be  necessary  to  provide  a  credit  column  for  Vouchers  Payable  and  debit  col- 
umns for  the  expenses  as  in  the  voucher  payable  register.  The  better  practice  is 
to  post  from  both  the  voucher  payable  register  and  the  cash  journal. 

5.  Used  Cars.  This  column  is  applicable  to  the  use  of  a  garage  which  acts 
as  sales  agent  for  automobiles  and  accepts  used  cars  as  part  payment  for  new  cars. 
The  exchange  value  of  each  used  car  is  entered  in  the  debit  column,  the  credit  for 
this  being  included  in  the  entry  in  the  "New  Cars  Sales,  Cr."  column.  The  debits 
for  purchases  are  recorded  in  the  entries  in  the  voucher  payable  register,  but  since 
it  is  not  customary  to  pay  cash  for  used  cars,  the  debit  to  this  account  will  not  be 
supported  by  a  voucher  unless  it  be  a  journal  voucher  issued  by  the  management, 
and  this  is  not  entered  in   the  voucher  payable  register. 

6.  Sales  Columns.  Seven  columns  are  provided  for  sales;  the  use  of  each  is 
indicated  by  the  name  of  the  account  written  at  the  top.  The  cost  of  the  material 
sold  is  recorded  in  the  voucher  payable  register.  The  debit  for  each  sale  is  recorded 
in  one  of  the  columns  at  the  left.  Thus,  if  cash  is  received  for  a  tire,  the  amount 
is  entered  in  the  "Bank,  Dr."  column  and  in  the  "Tires  and  Tubes  Sales,  Cr." 
column;  if  a  tire  is  sold  to  a  customer  on  account,  the  amount  is  entered  in  the 
"Accounts  Receivable,  Dr."  column  and  in  the  "Tires  and  Tubes  Sales,  Cr."  column. 

7.  Repair  Order  Number.  Each  repair  order  is  given  a  number,  and,  when 
completed,  the  Repairs  account  is  credited  for  the  amount  of  the  labor.  The  num- 
ber of  the  repair  order  is  entered  in  the  "Remarks"  column  to  facilitate  auditing. 

8.  Remarks.  This  is  for  any  special  explanation  of  the  transactions  which 
will  be  of  assistance  in  interpreting  the  record,  either  by  the  management  or  by 


CASH  JOURNAL 


349 


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Illustration  No.  148,  Right  Page  of  Voucher  Payable  Register. 

EXPLANATION.  Each  account  affected  by  the  vouchers  issued  is  debited  with  the  total 
of  the  amounts  entered  in  the  column  provided  for  the  account.  No  accounts  are  opened  with  the 
individuals  or  business  concerns  to  whom  vouchers  are  issued.  When  a  check  is  issued  in  payment 
of  a  voucher,  the  Vouchers  Payable  account  is  debited  by  entering  the  amount  in  a  column  pro- 
vided for  "Vouchers  Payable,  Dr."  in  the  cash  book  or  cash  journal. 

the  auditor.  Care  should  be  used  by  the  bookkeeper  in  explaining  the  transac- 
tions so  as  to  avoid  confusion.  Where  the  entry  is  supported  by  a  journal  voucher, 
the  number  of  this  voucher  should  be  indicated  in  the  "Remarks"  column  and 
the  journal  voucher  filed  for  reference.  Accountants  sometimes  refer  to  the 
cash  journal  as  the  "hash"  journal  because  of  confusion  in  recording  the  transac- 
tions; much  of  this  confusion  could  be  avoided  by  a  careful  explanation  in  the 
"Remarks"  column. 

9.  Method  of  Recording  Transactions.  The  equality  of  debits  and  credits 
is  maintained  in  the  recording  of  transactions  in  the  cash  journal  the  same  as 
in  the  elementary  journal  used  at  the  beginning  of  the  course.  To  insure  the 
equality  of  debits  and  credits,  transactions  which  affect  more  than  two  accounts 
should  be  recorded  in  journal  form  on  scratch  paper  before  the  entry  is  made 
in  the  cash  journal. 

When  cash  is  received  through  the  performance  of  a  transaction,  the  Cash 
account  is  debited  by  entering  the  amount  in  the  "Bank,  Dr."  column,  and  the 
proper  account  or  accounts  are  credited  by  entering  the  amount  in  the  column  or 
columns  at  the  right.  When  cash  is  paid  through  the  completion  of  a  transaction, 
the  Cash  account  is  credited  by  entering  the  amount  in  the  "Bank,  Cr."  column, 
and  the  Vouchers  Payable  account  is  debited  by  entering  the  amount  in  the 
"Vouchers  Payable,  Dr."  column  at  the  right.  When  credit  is  extended  to  a 
customer,  his  account  is  debited  by  entering  the  amount  in  the  "Accounts  Re- 
ceivable, Dr."  column,  and  the  Sales  account  or  accounts  credited  by  entering 
the  amount  in  the  "Sales,  Cr."  column  or  columns  affected.  Should  a  customer 
return  a  part  or  all  of  the  merchandise  purchased  and  receive  credit  for  its  value, 
the  Sales  Returns  account  is  debited  by  entering  the  amount  in  the  "General 
Ledger,  Dr."  column,  and  the  customer's  account  is  credited  by  entering  the  amount 

{Concluded  on  page  352) 


350 


CASH  JOURNAL 


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Illustration  No.  149,  Cash  Journal,  Left  Page. 

EXPLANATION.  The  cash  balance  at  the  beginning  of  the  month  is  entered  in  the  "Name 
of  Account  '  column  because  this  already  appears  in  the  ledger  on  the  debit  side  of  the  Merchants 
National  Bank  account  and  if  entered  in  the  Bank  Dr.  column  might  be  posted  again.  When 
provmg  cash,  the  total  receipts  (Bank  Dr.  column)  is  written  on  scratch  paper  and  the  balance  on 
hand  at  the  beginning  of  the  month  is  added  to  this  amount  before  deducting  the  payments  (Bank 
Cr.  column).     The  credit  for  each  amount  entered  in  the  Bank  Dr.  column  and  the  debit  for  each 


CASH  JOURNAL 


351 


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Illustration  No.  149,  Cash  Journal,  Right  Page. 

amount  entered  in  the  Bank  Cr.  column  are  recorded  in  one  or  more  of  the  columns  at  the  right  of 
the  name  of  the  account.  Transactions  which  do  not  involve  the  receipt  or  payment  of  cash  are 
recorded  in  the  columns  at  the  right  of  the  name  of  the  account.  The  breaks  indicate  a  number 
of  entries  omitted.  The  small  figures  above  the  totals  show  the  page  of  the  ledger  on  which  the 
account  to  which  the  amount  is  posted  appears.  This  amount  is  posted  to  the  debit  or  credit  side 
of  the  account  as  indicated  by  "Dr."  or  "Cr."  at  the  top  of  the  column. 


352 


CASH  JOURNAL 


in  the  "Accounts  Receivable,  Cr."  column;  it  will  be  necessary  to  write  "Sales 
Returns"  in  the  explanation  column  on  a  line  with  the  amount  entered  in  the 
"General  Ledger,  Dr."  column,  and  the  name  of  the  customer  on  a  line  with  the 
amount  entered  in  the  "Accounts  Receivable,  Cr."  column.  Each  transaction 
should  be  recorded  on  one  or  more  lines;  two  transactions  should  never  be  re- 
corded on  one  line.  A  full  explanation  of  the  transaction  should  be  made  in  the 
"Remarks"  column  at  the  right;  this  is  provided  for  the  explanation  of  the  transac- 
tion in  the  same  manner  as  space  is  provided  for  an  explanation  of  each  transac- 
tion in  a  book  of  original  entry. 

§  354.  Sales  JournaL  When  the  individual  sales  are  recorded  in  a  special 
sales  journal,  the  total  only  of  this  journal  is  transferred  to  the  cash  journal,  either 
weekly  or  monthly  depending  on  the  desires  of  the  management.  Illustration  No. 
150  shows  the  form  of  sales  journal  that  would  be  required  to  record  the  transac- 
tions in  the  practice  set,  provided  these  occur  with  sufficient  frequency  to  require 
the  use  of  this  special  journal. 

Sales  .lournal 


Date 


L.F. 


Account  Debited 


Address 


Terms 


Accts. 
Rec. 
Dr. 


Ace.  &  Pts. 
Sales 
Cr. 


Tires  &  T. 
Sales 
Or. 


G.,G.&0. 

Sales 
Cr. 


Storage 
Cr. 


Repairs 
Cr. 


Repair 

Order 

No. 


Illustration  No.  150,  Form  of  Sales  Journal. 

§  355.  Cash  Receipts  JournaL  When  transactions  in  which  cash  is  re- 
ceived from  customers  on  account  or  in  full  of  account  occur  with  sufficient  fre- 
quency to  justify  the  use  of  a  cash  receipts  journal  in  which  to  record  them,  the 
total  only  is  transferred  to  the  cash  journal  at  the  time  each  deposit  is  made,  or 
at  such  other  time  as  the  management  may  direct.  Illustration  No.  151  shows  the 
form  of  cash  receipts  journal  which  would  be  required  to  record  the  cash  received 
from  customers  in  the  practice  set  when  these  are  not  entered  direct  in  the  cash 
journal. 

Customers'  Cash  Receipts  Journal 


Date 


L.F. 


Account  Credited 


Explanation 


Accounts 

Receivable 

Cr. 


Merchants 

Natl  Bank 

Dr. 


Illustration  No.  151,  Form  of  Cash  Receipts  Journal. 


GARAGE  SET 

This  is  a  practice  set  without  vouchers  consisting  of  the  transactions  for  two 
months,  performed  by  the  Cowden  Buick  Company,  a  corporation  engaged  in  operat- 
ing a  garage.  The  transactions  are  separate  from  the  text  and  are  included  with 
the  books  of  account  necessary  to  record  them.  The  purpose  of  this  set  is  to  pro- 
vide practice  in  the  voucher  method  of  bookkeeping  and  in  recording  transactions 
in  the  cash  journal. 


Appendix  A 

SINGLE  ENTRY  BOOKKEEPING 

The  Purpose  of  this  Appendix  is  to  explain  and  illustrate  Single  Entry 
bookkeeping,  sometimes  referred  to  as  a  "method"  of  keeping  books.  The  informa- 
tion given  will  be  of  assistance  to  the  student  who  may  be  required  to  keep  books 
for  one  who  thinks  there  is  a  Single  Entry  method;  it  will  also  be  useful  if  the 
student  is  called  upon  to  change  from  this  so-called  method  to  Double  Entry. 

§  356.  Single  Entry  Bookkeeping.  Bookkeeping  is  the  systematic  record- 
ing of  business  transactions  as  explained  in  §  8.  When  the  values  received  and  the 
values  parted  with  in  each  transaction  are  recorded,  the  method  is  usually  referred 
to  as  "Double  Entry."  Single  Entry  bookkeeping  is  best  defined  as  any  method 
that  is  not  Double  Entry.  This  means  that  in  Double  Entry  bookkeeping  the 
values  received  and  the  values  parted  with  are  always  recorded,  but  in  Single  Entry 
the  values  received  and  the  values  parted  with  may  be  recorded  in  some  transac- 
tions, but  in  others  only  the  values  received  or  the  values  parted  with  are  recorded. 

§  357.  Comparison.  In  Single  Entry  the  record  may  be  made  according 
to  the  wishes  of  those  interested,  and  any  desired  accounts  kept;  in  Double  Entry 
the  record  and  accounts  kept  must  conform  to  certain  principles,  which  can  not 
be  changed;  the  name  of  an  account  might  be  changed,  but  its  real  meaning  must 
remain  the  same.  In  Single  Entry,  the  bookkeeper  has  no  check  on  his  accuracy 
in  posting,  footing  accounts  in  the  ledger,  and  making  the  Statement  of  the  Busi- 
ness; in  Double  Entry  he  proves  the  postings  and  footings  by  the  Trial  Balance 
and  the  net  profit  through  the  Balance  Sheet  and  Statement  of  Profit  and  Loss. 

The  advantages  of  Double  Entry  are  so  apparent  that  this  method  is  used  by  every  up-to-date 
business  man  who  employs  a  bookkeeper,  and  by  many  who  keep  their  own  books.  The  reason  Single 
Entry  is  used  in  many  cases  is  that  the  one  who  keeps  the  books  knows  nothing  of  the  many  advan- 
tages of  Double  Entry. 

§  358.  Books  of  Account.  Any  book  used  with  the  Double  Entry  method 
may  be  used  with  Single  Entry;  but  the  day  book,  cash  book,  and  ledger  are  the 
most  popular  with  those  who  claim  to  "know"  the  latter  method.  Of  course,  they 
do  not  know  any  method,  but  only  know  what  they  want  their  books  to  show,  and 
can  get  the  desired  results  by  using  these  three  books. 

§  359.  Day  Book.  This  is  a  book  of  original  entry.  All  transactions,  except 
those  in  which  cash  is  received  or  paid,  are  entered  in  this  book  in  the  order  in 
which  they  occur.  The  two  money  columns  do  not  indicate  debits  and  credits, 
hence  it  is  necessary  to  write  Dr.  and  Cr.  (abbreviation  of  debit  and  credit)  after 
the  name  of  the  account.  This  shows  to  which  side  of  the  account  in  the  ledger 
the  amount  is  to  be  posted.  Amounts  to  be  posted  are  placed  in  the  second  column 
on  the  same  line  as  the  name  of  the  account.  Illustration  No.  152  shows  the  form 
of  day  book  to  be  used. 

§  360.  Single  Entry  Cash  Book.  Any  desired  form  of  ruling  may  be  used. 
The  form  given  in  Illustration  No.  153  shows  one  very  popular  with  those  who 
keep  a  cash  book  in  connection  with  a  Single  Entry  set  of  books.  The  ruling  is 
similar  to  the  ordinary  journal;  receipts  are  entered  in  the  first  column,  and  pay- 
ments in  the  second  column.  When  the  cash  book  is  ruled  at  the  end  of  the  month, 
the  balance  is  entered  in  the  credit  column,  the  word  "Balance"  written  at  the  left, 
the  two  columns  ruled,  and  the  balance  brought  down,  as  in  Illustration  No.  153. 

§  361.  Ledger.  This  book  may  be  similar  to  any  ledger  used  with  a  Double 
Entry  set  of  books;  that  is,  it  may  have  the  regular  ledger  ruling  or  any  special 
ruling  adapted  to  the  needs  of  the  business.     In  every  case  it  must  be  ruled  with 

*  353 


354 


APPENDIX  A 


two  money  columns,  one  for  the  debit  amounts,  and  one  for  the  credit  amounts. 
Some  blank  book  manufacturers  make  a  book  which  is  labeled  "Single  Entry 
Ledger."  This  is  ruled  like  the  day  book  and  provided  with  an  index.  This  form 
is  used  when  the  day  book  and  cash  book  are  omitted,  and  the  transactions  are 
entered  direct  in   the   ledger. 


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APPENDIX  A  355 

TRANSACTIONS  FOR  DECEMBER. 

Record  the  following  transactions  in  the  Single  Entry  day  book  and  cash  book,  and  post  to 
the  ledger  when  instructed.  Accounts  will  be  kept  with  Notes  Receivable,  Notes  Payable, 
C.  W.  Ogden  Capital,  persons  from  whom  merchandise  is  purchased  on  account,  and  persons  to 
whom  merchandise  is  sold  on  account. 

1.  C.  W.  Ogden  invests  $1,500.00  in  the  retail  stationery  and  office  supplies 
business. 

Enter  in  the  cash  book  as  in  Illustration  No.  153. 

2.  Bought  from  W.  H.  LaRue,  City,  stock  of  stationery  and  office  supplies 
for  $2,250.00,  paying  cash  $1,000.00,  two  notes  of  $500.00  each,  due  in  60  and  90 
days,   balance   to  be   paid   before  January    ist. 

Enter  in  the  day  book  and  cash  book  as  in  Illustrations  Nos.  152  and  153. 

3.  Bought  from  Belknap  Stationery  Co.,  Louisville,  on  account,  stationery 
per    invoice    of    this    date,    $150.00. 

Enter  in  the  day  book  as  in  Illustration  No.  152. 

Sales  on  account:  C.  G.  McClure,  City,  i  section,  base,  and  top,  Y.  &  E. 
files,  $25.00;  I  gross  note  books,  $17.50.  University  School,  University  Park,  i 
multigraph,   $170.00;     i    doz.    ribbons,   $5.00. 

Enter  in  the  day  book  as  in  Illustration  No.  152. 

4.  Bought  from  Graham  Paper  Co.,  St.  Louis,  stationery  per  invoice  of  the 
3d,   $196.42;     terms,   3/10,    n/30. 

The  terms  indicate  that  3%  may  be  deducted  if  payment  is  made  within  ten  days. 

5.  Paid  Gouffon  Transfer  Co.  $14.87,  freight  and  drayage  on  above  goods. 

Enter  in  the  cash  book  as  in  Illustration  No.  153.  No  account  is  kept  with  Freight  and  Dray- 
age, hence  the  check  mark  {  V )  in  the  L.  F.  column. 

6.  Sale  on  account:  C.  J.  McDaniels,  City,  i  ledger,  $3.50;  i  doz.  pencils, 
75c;    2    boxes   typewriting   paper   at   $1.00;     i    dictionary,   $14.00. 

Paid  W.  H.  LaRue  $150.00  on  account; 

Paid  employees'  wages  to  date,  $65.40. 

Cash  sales  to  date,  $204.09. 

Post  the  entries  in  the  da\'  book  and  cash  book.  Each  amount  in  the  second  column  of  the 
day  book  is  posted  to  the  debit  or  credit  side  of  the  account  written  on- the  same  line  with  it;  the 
debit  or  credit  is  indicated  by  "Dr."  or  "Cr."  Each  amount  in  the  first  column  of  the  cash  book 
is  posted  to  the  credit  side  of  the  account  written  on  the  same  line  with  it,  unless  it  has  a  check  mark 
in  the  L.  F.  column;  each  amount  entered  in  the  second  column  is  posted  to  the  debit  side  of  the 
account  written  on  the  same  line  with  it,  unless  it  has  a  check  mark  in  the  L.  F".  column.  Allow 
one-fifth  of  a  page  for  each  account. 

8.  Bought  from  American  Stationery  Co.,  Cincinnati,  merchandise  per 
invoice  of  the  6th,  $264.75;    terms,   5/10,   n/60. 

9.  Sale  on  account:  R.  R.  Oglesby  &  Co.,  Hamilton,  i  typewriter,  $100.00; 
I  desk,  $35.00;  5  gross  note  books  at  $14.00;  2  sections  Y.  &  E.  files  with  top 
and   base,   $64.00. 

10.  Received  $175.00  from   University  School   in   full  of  account. 

11.  Paid  electric  light  bill,  $13.60;    phone  rent,  $6.00;  and  stamps,  $5.00. 
Sales  on  account:    Ormendorff  Bros.,  City,   i  set  of  Dickens,  $70.00.     City 

Electric  Co.,  City,  i  gross  tablets,  $17.00;  3  sections  Y.  &  E.  files  at  $14.00;   i  desk, 
$36.00;     5   ink   wells   at   25c. 

12.  Bought  from  Yawman  &  Erbe  Mfg.  Co.,  Rochester,  merchandise  per 
invoice  of  the  loth,  $136.42;  terms,  60  days.  Bought  from  Johnston  Bros.,  City. 
on  account,  5  gross  mucilage  at  $2.50. 

13.  Paid  Graham  Paper  Co.  amount  due,  less  discount. 
Enter  in  the  cash  book  as  in  Illustration  No.  153. 

{Continued  on  page  356  ) 


356  APPENDIX  A 

{December  Transactions — Continued  from  page^SS-) 

13.  Sales  on  account:  M.  B.  Arnstein,  City,  2  gross  tablets  at  $17.75;  i 
desk,  $39.50;  2  sections  Y.  &  E.  files  at  $14.00.  Bean,  Waters  &  Co.,  City,  3 
gross  tablets  at  $14.00;     i   box  typewriting  paper,  $1.00. 

Paid  cash  as  follows:  C.  W.  Ogden,  private  use,  $50.00;  employees'  salaries 
for  the  week,  $86.45;    Gouffon  Transfer  Co.,  freight  and  drayage,  $32.65. 

Cash  sales  to  date,  $291.76. 

Post  from  the  day  book  and  cash  book. 

15.  Collected  from  the  following  parties:  C.  G.  McClure,  $42.50;  C.  J. 
McDaniels,   $10.00;    Ormendorfif   Bros.,   $50.00;    City   Electric   Co.,   $70.00. 

Sales  on  account:  C.  G.  McClure,  5  gross  tablets  at  $14.00;  i  desk,  $57.50. 
H.  O.  Nelson,  City,  i  typewriter,  $100.00;  i  gross  penholders,  $5.00;  5  boxes  type- 
writing paper  at  $1.00;    10  lbs.  writing  paper  at  25c. 

16.  Paid   American   Stationery   Co.   $175.00   on   account. 

This  is  subject  to  5%  discount  as  per  terms.      Be  sure  to  debit  them  with  the  correct  amount. 
Sale  on  account:   Central  Business  College,  City,  5  gross  note  books  at  $14.00; 
I  gross  tablets,  $30.00;    i  gross  penholders,  $4.00;    8  gross  ink  at  $3.75. 

17.  R.  R.  Oglesby  &  Co.  gave  us  their  note  due  in  30  days  for  $200.00  to 
apply   on   account. 

Bought  from  Yawman  «&  Erbe  Mfg.  Co.,  Rochester,  merchandise  per  invoice 
of  the   nth,  $1,254.78;    terms,  60  days. 

18.  Sales  on  account:  C.  G.  McClure,  3  typewriters  at  $100.00;  i  gross 
pens,  $5.00;    I  doz.  ribbons,  $7.50.     W.  R.  Austin,  Wilmington,  i  journal,  $6.00. 

Bought  from  Graham  Paper  Co.,  stationery  per  invoice  of  the  15th,  $136.49; 
terms,  3/10,  n/30. 

19.  Accepted  Yawman  &  Erbe  Mfg.  Company's  60-day  draft  in  full  of  in- 
voice dated   December   loth. 

Paid  W.   H.  LaRue  $50.00  on  account. 

Sales  on  account:  Ormendorff  Bros.,  i  desk,  $35.00;  i  gross  note  books, 
$18.00;  3  sections  Y.  &  E.  files  at  $14.00.  W.  H.  Pedigo,  Danville,  i  desk,  $45.00; 
I   chair,  $12.50;    3  gross  tablets  at  $17.50;    100  blotters,  25c. 

20.  Bought  from  Yawman  &  Erbe  Mfg.  Co.,  merchandise  per  invoice  of  the 
i8th,    $234.75;     terms,    4/10,    n/30. 

Cash  sales  to  date,  $408.50. 

Withdrew  $75.00  for  private  use;   paid  employees  to  date,  $92.75. 
Post  from  the"  day  book  and  cash  book. 

22.  Collected  from  customers  as  follows:  M.  B.  Arnstein,  in  full;  Bean, 
Waters  &  Co.,  in  full;   C.  G.  McClure,  $100.00;   Central  Business  College,  $100.00, 

Discounted  R.  R.  Oglesby  &  Co.'s  note  at  the  bank,  receiving  credit  for  the 
face  value,  less  $3.00  discount. 

Enter  face  of  the  note  in  the  first,  and  discount  in  the  second  column  of  the  cash  book. 

23.  Sale  on  account:  University  School,  3  gross  note  books  at  $17.00;  2 
gross  penholders  at  $5.00;  5  gross  pencils  at  $4.00;  100  lbs.  writing  paper  at  20c; 
I   ledger,  $2.75. 

Paid    W.    H.    LaRue    balance    due    him. 

24.  Bought  from  American  Stationery  Co.,  merchandise  per  invoice  of  the 
22d,   $186.75;    terms,   5/10,   n/60. 

{Concluded  on  page  357.) 


APPENDIX  A  357 

{December  Transactions — Conthiued  Jroni  page  356.) 
24.     Sales  on  account:    Central  High  School  Supply  Store,  City,  2  gross  jour- 
nals at  $20.00;    2  gross  ledgers  at  $20.00;    5  gross  note  books  at  $14.00;    10  gross 
penholders  at  $5.00;   5  gross  pencils  at  $4.55;   2  gross  ink  at  $4.00.     City  Electric 
Co.,    I   duplicator,   $75.00. 

Sent  Graham  Paper  Co.  a  check  in  full  of  account,  less  discount. 

26.  Central  High  School  Supply  Store  settled  their  account  in  full,  less  2%, 
per    contract. 

W.  H.  Pedigo  gave  us  his  note  due  in  30  days  in  full  of  account. 
Paid    Belknap   Stationery   Co.,    $75.00   on   account. 

Bought  from  Standard  Stationery  Co.,  Cincinnati,  merchandise  per  invoice 
of   the   23d,   $62.75;    terms,   60  days. 

27.  Sent  Yawman  «&  Erbe  Mfg.  Co.  a  New  York  Exchange  in  full  of  invoice 
dated  the  i8th,  less  4%  discount.    The  bank  charges  50c  for  issuing  the  exchange. 

Sale  on  account:    H.  O.  Nelson,  i  typewriter  with  special  keyboard,  $105.00. 

29.  Received  from  H.  O.  Nelson  a  60-day  note  in  full  of  account. 

30.  Bought  from  Chatfield  &  Woods,  City,  merchandise  per  invoice  of  the 
27th,    $169.25;     terms,    3/10,    n/60. 

31.  Cash    sales    to    date,    $268.15. 

Paid  employees  to  date,  $86.27;  rent  for  the  month,  $50.00;  Gouffon  Transfer 
Co.,  bill  for  freight  and  drayage  to  date,  $62.75. 

Post  all  entries  to  date,  and  make  a  Statement  of  the  Business  as  explained  in  §  362  and  Illustra- 
tion _No.  154  using  the  following  inventories:  Merchandise  in  stock,  $2,565.87;  Office  Equipment, 
consisting  of  desks,  chairs,  safe,  etc.,  $200.00.  Close  the  ledger  as  explained  in  §  363,  and  make 
the  opening  entrj'  in  the  journal  to  change  to  Double  Entry  as  explained  in  §  364  and  in  Illustration 
No.  155.  When  this  is  completed,  post  the  entries  to  the  ledger,  take  a  Trial  Balance  and  present 
all  books  for  approval. 

§  362.  Single  Entry  Statement.  The  net  profit  or  net  loss  can  always  be 
ascertained  whether  the  books  are  kept  by  Single  Entry  or  Double  Entry.  To 
make  a  Single  Entry  statement  proceed  as  follows:  First,  ascertain  the  value  of 
all  property  on  hand  by  taking  an  inventory.  Second,  list  the  assets  and  liabilities. 
As  nothing  but  asset  and  liability  accounts  are  kept,  all  debit  balances  are  assets, 
and  all  credit  balances,  except  the  investment,  are  liabilities.  Third,  ascertain  the 
difference  between  the  assets  and  liabilities;  this  is  the  present  worth  of  the  busi- 
ness. If  it  is  more  than  the  net  investment,  there  is  a  profit;  if  less,  a  loss.  Illus- 
tration No.  154  shows  the  correct  form  of  Single  Entry  statement. 

§363.  Closing  the  Ledger.  As  each  account  in  the  ledger,  except  the 
proprietor's  Capital  account,  shows  an  asset  or  a  liability,  the  proprietor's  Capital 
account  is  the  only  one  to  close.  It  is  closed  in  the  same  manner  as  the  proprie- 
tor's Capital  account  in  Double  Entr>^  as  explained  on  page  93.  The  profit  is 
entered  on  the  credit  side,  or  the  loss  on  the  debit  side,  with  red  ink,  the  account 
ruled  with  single  and  double  red  lines,  footed  with  black  ink,  and  the  "Present 
Capital"   brought   down   in   black   ink  on    the   credit   side. 

§  364.  Changing  from  Single  to  Double  Entry.  When  it  is  desired  to 
change  the  books  from  the  Single  Entry  method  to  that  of  Double  Entry,  it  is 
necessary  to  make  a  statement  of  the  business,  and  close  the  ledger,  as  explained 
in  §§  362  and  363.  A  journal  entry  is  made  from  this  statement,  debiting  all 
accounts  that  show  assets,  and  crediting  those  showing  liabilities,  and  the  pro- 
prietor for  the  investment;  see  Illustration  No.  155.  This  journal  entry  will  balance, 
since  the  total  liabilities,  plus  the  present  worth  of  the  proprietor  equals  the  assets. 


358 


APPENDIX  A 

SINGLE  ENTRY  STATEMENT,  DECEMBER  31,  19 


ASSETS 

Cash 

1099 

60 

Merchaniilse  in  stoclc  f  Inventory) 

2555 

87 

Office  Equipment  (Inventory) 

200 

Ledger  Accounts : 

Notes  Receivable 

337 

66 

C.  G.  McClure 

350 

University  School 

101 

50 

C.  J.  McDaniels 

12 

75 

R.  R.  Ogleeby  &  Co. 

87 

City  Electric  Co. 

110 

25 

Ormendorff  Bros. 

103 

Central  Business  College 

30 

W.  R.  Austin 
Total  Assets 

8 

5005 

63 

LIABILITIES 

■ 

Ledger  Accounts: 

Notes  Payable 

1146 

33 

Belknap  Stationery  Co» 

95 

American  Stationery  Co. 

276 

59 

Johnston  Bros. 

13 

75 

Yawman  &  Erbe  Mfg.  Go. 

1252 

38 

Standard  Stationery  Co. 

58 

80 

Chatfield  &   Woods 
Total  Liabilities 

C.  W.  Ogden's  Present  Capital 

172 

50 

3015 

35 

1990 

28 

C.  W.  Ogden'8  Net  Investment 
C.  W.  Ogden's  Net  Profit 

1375 

615 

28 

Illustration  No.  154,  Single  Entry  Statement. 

It  is  customary  to  write  "Inventory"  in  the  explanation  columns  of  the  Merchan- 
dise Inventory  and  Office  Equipment  accounts,  and  "Balance"  in  the  explanation 
column  of  the  Cash  account.  After  all  the  accounts  are  opened  in  the  ledger,  a 
Trial  Balance  is  taken  to  prove  that  the  books  are  in  balance. 

JANUARY  I,  19  .. 


Cash 

Merchandise  Inventory 

Office  Equipment  (Inventory) 

Notes  Receivable 

C.  G.  McClure 

University  School 

C.  J.  McDaniels 

R.  R.  Oglesby  &  Co. 

City  Electric  Co. 

Ormendorff  Bros. 

Central  Business  College 

W.  R.  Austin 

Notes  Payable 

Belknap  Stationery  Co. 

American  Stationery  Co. 

Johnston  Bros. 

Yawman  &  Erbe  Mfg.  Co. 

Standard  Stationery  Co. 

Chatfield  &  Woods 

C.  W.  Ogden,  Capital 
Assets  and  liabilities  at  the  beginning  of  the  business 

Illustration  No.  155,  Journal  Entry  to  Change  from  Single  Entry  to  Double  Entry. 


1099 
2565 

60 

87 

200 

337 

66 

350 

lOI 

50 

12 

75 

«7 

no 

25 

103 

30 

8 

1 146 

33 

95 

276 

59 

13 

75 

1252 

38 

58 

80 

172 

50 

1990 

28 

Appendix  B 

DIRECT  METHOD  OF  CLOSING  THE  LEDGER 

The  Purpose  of  this  Appendix  is  to  explain  the  process  of  making  the 
closing  entries  direct  in  the  ledger  as  explained  in  §  60.  The  student  should  under- 
stand both  methods  so  that  he  may  apply  either  as  directed. 

§  365.  Closing  the  Ledger,  as  explained  in  §  53,  is  an  accounting  term 
applied  to  the  process  of  transferring  the  net  profit  or  net  loss  to  the  owner's  Cap- 
ital account  at  the  close  of  a  fiscal  period.  The  process  of  making  direct  in  the 
ledger  the  entries  necessary  to  transfer  the  net  profit  or  loss  to  the  owner's  Capital 
account  is  the  same  as  with  the  journal  entry  method. 

A  comparison  of  Illustration  No.  156  with  the  illustrations  on  pages  360  and 
361  shows  the  use  of  the  Statement  of  Profit  and  Loss  as  a  guide  in  closing,  and 
the  method  of  making  these  entries.  The  complete  accounts  used  in  the  illus- 
trations are  shown  on  pages  72  and  73  and  are  the  same  accounts  as  those  used 
as  a  basis  for  discussing  the  closing  by  the  journal  entry  method,  pages  94-96. 
The  ledger  on  pages  362  and  363  shows  the  accounts  on  pages  72  and  73  after 
the  closing  entries  explained  on  pages  360  and  361  have  been  completed;  these 
pages  are  the  same  as  the  accounts  on  pages  91-93,  except  that  red  ink  is  used  in 
the  closing  entry  in  each  account  and  the  page  of  the  ledger  is  shown  in  the  folio 
column  instead  of  the  page  in  the  journal. 

When  the  direct  method  is  used,  it  is  customary  to  indicate  the  closing  entries  which  require 
the  transfer  of  the  balance  of  one  account  to  another,  by  the  use  of  red  ink;  for  this  reason,  the 
direct  method  of  closing  the  ledger  is  sometimes  referred  to  as  the  "red  ink  method."  The  date, 
page  of  the  ledger  to  which  the  balance  of  the  account  is  transferred,  and  the  amount,  are  entered 
with  red  ink,  but  the  same  facts,  when  entered  on  the  opposite  side  of  the  account  to  which  they 
are  transferred,  are  entered  in  black  ink. 


6  ¥■ 


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Illustration  No.  156,  Statement  of  Profit  and  Loss. 

359 


360 


APPENDIX  B 


C^CO: 


(yU 


The  First  Entry  is  that  required  to  record  the  merchandise  inventory  at  the  close  of  the  fiscal 
period.     This  entry  is  neces-  ^^  . 

sary  because  the  cost  of  sales  '  ^;^Zi-^>--c-^C-t^-^^^i,^- 

is  ascertained  on  the  State- 
ment of  Profit  and  Loss  by 
subtracting  the  inventoryat 
the  close  of  the  fiscal  period 
from  the  net  purchases.  The 
Inventory  account  is  debited 
to  record  the  asset;  the  Pur- 
chases account  is  credited  for 
the  inventory  to  indicate  the 
subtraction. 

The  illustration  at  the 
right  shows  the  Purchases 
account  before  the  first  entry 
has  Iseen  made,  and  the  In- 
ventory and  Purchases  ac- 
counts as  they  appear  after 
this  entry  has  been  made. 


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The  Second  Entry  is  that  required  to  transfer  the  balance  of  the  Purchases  account  to  the 
Sales  account.    This  entry  is  Js^4-^:^:^> 

necessary  because  the  profit 
on  sales  is  ascertained  on  the 
Statement  of  Profit  and  Loss 
by  subtracting  the  cost  of 
merchandise  sold  from  the 
net  sales.  The  Sales  account 
is  debited  for  the  cost  of  sales 
to  indicate  the  subtraction. 
Purchases  is  credited  because 
this  account  shows  the  cost 
of  sales.  After  this  entry  is 
made,  the  Purchases  account 
will  balance  and  be  ruled, 
and  the  balance  of  the  Sales 
account  will  show  the  net 
profit  on  sales  as  shown  by 
the  Statement  of  Profit  and 
Loss. 

The  illustration  at  the 
right  shows  the  Sales  and 
Purchases  accounts  before 
the  second  entry  has  been 
made,  and  the  Sales  and  Pur- 
chases accounts  after  this 
entry  has  been  made. 

The  Third  Entry  is  that  required  to  transfer  the  balance  of  the  Sales  account  to  the  Profit 
and  Loss  account.  This  entry 
is  necessary  because  it  is  cus- 
tomary to  show  in  the  ledger 
a  summary  of  the  facts  shown 
by  the  Statement  of  Profit 
and  Loss.  The  Sales  account 
is  debited  because  it  shows 
the  profit  on  sales;  the  Profit 
and  Loss  account  is  credited 
because  this  account  is  cred- 
ited for  all  income.  After 
this  entry  is  made,  the  Sales 
account  will  balance  and  be 
ruled,  and  the  Profit  and  Loss 
account  will  show  the  profit 
on  sales. 

The  illustration  at  the 
right  shows  the  Sales  account 
before  the  third  entry  has 
been  made,  and  the  Sales  and 
Profit  and  Loss  accounts  after 
this    entry   has   been   made. 


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APPENDIX  B 


361 


The  Fourth  Entry  is  that  required  to  transfer  the  balance  of  the  Expense  account  to  the 


Profit  and  Loss  account.  This 
entry  is  necessary  because  the 
net  profit  is  ascertained  on 
the  Statement  of  Profit  and 
Loss  by  subtracting  the  ex- 
pense from  the  profit  on 
sales.  The  Profit  and  Loss 
account  is  debited  to  indicate 
the  subtraction;  the  Expense 
account  is  credited  because 
this  account  shows  the  ex- 
pense for  the  period.  After 
this  entry  is  made,  the  Ex- 
pense account  will  balance 
and  be  ruled  and  the  balance 
of  the  Profit  and  Loss  account 
will  show  the  net  profit. 

The  illustration  at  the 
right  shows  the  Profit  and 
Loss  and  the  Expense  ac- 
counts before  the  fourth 
entry  has  been  made,  and 
the  Profit  and  Loss  and  the 
Expense  accounts  after  this 
entry  has  been  made. 


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O-c^ 


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Q-i^  \j/    l^'C^Cc-^T^^^ 


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j-<if 

The  Fifth  Entry  is  that  required  to  transfer  tht  balance  of  the  Profit  and  Loss  account  to  the 
proprietor's  Capital  account. 


This  entry  is  necessary  be 
cause  the  purpose  of  closing 
the  ledger  is  to  transfer  the 
net  profit  to  the  proprietor's 
account.  The  Profit  and  Loss 
account  is  debited  because 
this  account  shows  the  net 
profit;  the  proprietor's  Cap- 
ital account  is  credited  be- 
cause this  profit  is  equivalent 
to  an  additional  investment. 
When  this  entrj'  is  made,  the 
Profit  and  Loss  account  will 
balance  and  be  ruled,  and  the 
proprietor's  Capital  account 
will  show  his  present  pro- 
prietorship as  shown  by  the 
Balance  Sheet. 

The  illustration  at  the 
right  shows  the  Profit  and 
Loss  account  and  the  account 
with  W.  A.  Gordon,  Capital, 
before  the  fifth  entry  has 
been  made,  and  the  Profit 
and  Loss  and  W.  A.  Gordon 
Capital  accounts  after  this 
entry  has  been  made. 


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(«^^^-,«^l<^  <Z-?&«>^«i?^«-<2 


C'i>/'\  ^A  C^^iC^lu^n-ii-e^ 


^Si'^ 


j/^^it]&<^ 


Closing  the  Inventory  Account 

The  inventory  of  merchandise  at  the  close  of  the  fiscal  period  may  remain  in  the  Purchases 
account  throughout  the  next  fiscal  period,  or  it  may  be  closed  into  the  Purchases  account  at  the 
beginning  of  the  next  period;  the  transfer  of  the  inventory  from  the  Inventory  account  to  the  Pur- 
chases account,  whether  made  at  the  beginning  or  close  of  the  fiscal  period,  should  be  through  a  gen- 
eral journal  entry  as  illustrated  on  page  96.  • 


362 


APPENDIX  B 


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Illustration  No.  157,  Ledger  Closed  by  Direct  Method — Continued. 

The  Above  Accounts  Before  They  are  Closed  are  shown  on  page  73.  It  is  necessary  to  open  the 
Inventory  account  in  connection  with  the  closing  entries  because  it  is  an  asset  which  is  not  recorded. 
The  process  of  closing  these  accounts  is  analyzed  and  explained  on  pages  360  and  361. 


APPENDIX  B 


363 


aj 


L^/  y^:./A<n/-(3t^>c:^ 


•it\ 


/  r  r^jz^ 


OrOr 


/ 


Illustration  No.  158,  Ledger  Closed  by  Direct  Method — Concluded. 


It  is  Customary  to  Balance  the  Capital  Account  after  the  ledger  is  closed  and  to  carry  the  pres- 
ent capital  down  under  date  of  the  next  business  day.  The  illustration  above  shows  the  process 
of  balancing  W.  A.  Gordon's  Capital  account  which  appears  at  the  bottom  of  page  72. 

The  Profit  and  Loss  Account  contains  a  summary  of  the  cost  and  income  as  shown  by  the  State- 
ment of  Profit  and  Loss.  The  account  is  opened  at  the  close  of  the  fiscal  period  in  connection  with 
the  closing  entries  and  closed  when  the  profit  is  transferred  to  the  Capital  account,  and  remains 
closed   throughout  the  period. 


Oe^?::,?-^^^^ 


3/yf 


/ 

J 
¥- 


2.    tf    ir  '2. 


jL^IL 


■>■  7 


2:^^ 


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Illustration  No.  159,  Post-closing  Trial  Balance,  Model  Set 

The  Equality  of  Debits  and  Credits  is  maintained  in  recording  the  closing  entries;  hence  the 
ledger  should  be  in  balance  if  these  entries  have  been  made  correctly.  The  Trial  Balance  in  the  illustra- 
tion is  taken  from  the  ledger  accounts  on  pages  70,  71,  91  and  362.  The  accounts  receivable  and 
accounts  payable  are  grouped  and  entered  in  one  amount  because  none  of  these  accounts  in  the 
ledger   are   affected    by   the   closing. 


Appendix  C 

INCOME  TAX  RETURN 

The  Purpose  of  this  Appendix  is  to  explain  briefly  the  income  tax  and  to 
show  the  method  of  preparing  the  return  for  an  individual,  a  partnership  and  a  cor- 
poration on  blanks  provided  by  the  Government.  The  student  can  see  from  the 
discussion  and  illustrations  that  when  all  the  information  needed  is  available,  the 
preparation  of  the  return  is  not  a  difihcult  problem. 

§365.  Income  Tax.  There  are  thfee  methods  of  taxation :  (a)  a  percentage 
of  the  value  of  property,  (b)  a  fixed  amount  for  privilege  granted,  and  (c)  a  per- 
centage of  net  income.  Taxes  collected  on  a  property  valuation  basis  are  referred 
to  as  "property  taxes;"  taxes  collected  for  privileges,  as  "license"  and  "stamp 
tax;"  taxes  collected  on  income,  as  "income  tax."  The  property  owner  submits 
a  schedule  of  his  property  as  a  basis  for  taxation;  the  one  who  wishes  to  secure  a 
privilege  pays  in  advance  for  the  same  and  receives  stamps  or  a  receipt  authorizing 
him  to  exercise  the  privilege  granted  thereby — that  is,  he  receives  a  license  to 
perform  certain  business  transactions;  the  one  who  receives  an  income  submits 
a  schedule  of  his  gross  income  and  the  deductions  therefrom,  as  a  basis  for  taxation. 

State,  city  and  county  governments  usually  levy  taxes  on  property  and  privi- 
leges, though  a  few  states  have  levied  taxes  on  income.  The  United  States  Gov- 
ernment levies  taxes  on  privileges  and  income;  privileges  are  granted  through  the 
sale  of  stamps,  and  the  taxes  on  income  are  collected  yearly.  The  full  amount  of 
the  tax  levied  on  income  may  be  paid  at  the  time  the  income  tax  return  is  pre- 
sented to  the  collector,  or  quarterly — one-fourth  at  the  time  the  return  is  made 
and  the  balance  in  three  equal  installments. 

The  income  tax  return  is  prepared  by  the  taxpayer  on  a  blank  provided  by 
the  Government,  and  within  seventy-five  days  from  the  close  of  the  period  which 
it  covers.  The  offtcial  form  contains  two  pages  of  instructions  in  addition  to  the 
pages  required  for  the  return.  The  taxpayer  should  retain  a  copy  of  the  return; 
he  removes  the  two  pages  of  instructions  from  the  blank  before  it  is  presented 
to  the  Collector  of  Internal  Revenue. 

The  discussion  of  income  tax  here  refers  to  that  levied  by  the  United  States  Government.  The 
states  which  levy  taxes  on  income  usually  accept  the  report  made  to  the  Federal  Government 
as  a  basis  for  taxation.  The  process  of  levying  a  tax  on  income  by  foreign  governments  is  along  the 
same  line  as  that  used  by  the  United  States  Government. 

§  367.  Gross  Income,  as  defined  in  Section  213  (a)  of  the  1921  Revenue 
Act,  includes  income  derived  from  salaries,  professional  services,  the  operations 
of  a  business,  or  special  transactions  from  which  the  taxpayer  derives  profit.  The 
amount  of  all  such  items  is  to  be  included  in  the  gross  income  for  the  taxable  year 
as  listed  on  the  income  tax  return. 

Income  from  the  operations  of  a  business,  income  received  as  salary  for  services  rendered,  in- 
come from  the  rent  of  real  estate  owned  by  the  taxpayer,  interest  on  bonds,  and  dividends  on  stock 
owned  by  the  taxpayer  are  examples  of  items  composing  gross  income. 

§  368.  Exempt  Income.  The  taxpayer  is  not  required  to  pay  tax  on  all 
income.  Space  will  not  permit  a  complete  discussion  of  these  exemptions  here, 
but  they  are  given  in  detail  in  Section  213  (b)  of  the  1921  Revenue  Act,  a  compli- 
mentary copy  of  which  will  be  provided  any  teacher  of  bookkeeping  by  the  pub- 
lishers of  this  text. 

The  proceeds  of  life  insurance  policies,  the  value  of  property  acquired  by  gift,  interest  on  the 
obligations  of  the  United  States  (with  certain  exceptions),  income  from  domestic  building  and  loan 
associations  (with  certain  exceptions),  and  the  rental  value  of  a  dwelling  house  furnished  a  minister 
of  the   gospel  are   examples   of  exempt   income. 

364 


APPENDIX  C  365 

§  369.  Deductions  Allowed  Individuals.  Every  individual  taxpayer  is 
allowed  certain  deductions  from  his  gross  income  which  are  to  be  subtracted  from 
the  gross  income  to  ascertain  the  net  income  on  which  he  is  to  pay  tax.  He  is  also 
allowed  a  personal  exemption  of  $1,000.00,  if  single;  or  $2,500.00  if  married  or 
the  head  of  a  family.  These  exemptions  are  given  in  detail  in  Sections  214  and 
216  of  the  1 92 1  Revenue  Act. 

All  the  expenses  necessary  for  the  operation  of  a  trade  or  business,  including  salaries,  travel- 
ing expenses,  rent,  etc.;  interest  paid  on  borrowed  capital;  taxes  paid  to  a  city  or  state;  losses  sus- 
tained from  failure  to  collect  accounts  receivable;  losses  sustained  on  account  of  the  sale  of  prop- 
erty belonging  to  the  taxpayer;  a  reasonable  allowance  for  exhaustion,  wear  and  tear  of  property 
used  in  the  of>erations  of  the  business  of  the  taxpayer;  and  contributions  to  charity  (by  individuals 
only)  are  examples  of  the  deductions  allowed. 

§  370.  Deductions  Not  Allowed.  The  taxpayer  cannot  deduct  all  of  his 
expenses  from  gross  income  in  order  to  ascertain  his  net  income.  Items  which  are 
not  deductible  are  given  in  Section  215  of  the  1921  Revenue  Act. 

Personal,  living  and  family  expenses,  amounts  paid  for  new  buildings,  improvements  or  better- 
ments, amounts  expended  in  restoring  property  or  in  making  good  the  exhaustion  thereof,  and 
amounts  paid  as  premiums  for  life  insurance  are  examples  of  deductions  not  allowed. 

§  371.  Individual  Income  Tax  Return.  Every  individual  having  a  net 
income  of  $1,000.00  or  more,  if  single,  or  $2,000.00  or  more,  if  married,  or  a  gross 
income  of  $5,000.00  or  more,  must  submit  an  income  tax  return  showing  the  amount 
of  his  gross  income  and  the  deductions  therefrom.  The  income  of  an  individual 
may  be  derived  from  a  salary,  investment,  or  the  profits  resulting  from  the  opera- 
tions of  a  business,  as  explained  in  §  i.  The  return  includes  the  income  and  de- 
ductions for  one  year,  which  may  end  December  31  or  on  any  other  date. 

Illustrations  Nos.  160  and  161  show  the  income  tax  return  submitted  by  W.  A.  Gordon  for  the 
year  ending  August  31,  1922.  This  was  prepared  from  the  facts  given  in  §  374.  Illustrations  Nos. 
162  and  163  contain  instructions  for  preparing  the  income  tax  return. 

§  372.  Partnership  Income  Tax  Return.  A  partnership  is  required  to 
submit  an  income  tax  return  at  the  conclusion  of  each  fiscal  period  of  twelve  months, 
but  the  tax  is  paid  by  the  individual  partners.  The  information  for  the  income 
tax  return  is  obtained  from  the  Statement  of  Profit  and  Loss  prepared  from  the 
accounts  resulting  from  the  performance  of  business  transactions  during  the  year. 
The  partnership  is  allowed  the  same  deductions  as  the  individual,  with  the  ex- 
ception of  contributions  to  charity. 

Illustrations  Nos.  164  and  165  show  the  front  and  back  of  the  partnership  income  tax  return 
prepared  from  the  Statement  of  Profit  and  Loss  (Illustration  No.  93)  for  C.  W.  Keeland  &  Co.,  a 
partnership  composed  of  C.  W.  Keeland  and  A.  D.  Munson.  The  distribution  of  the  expenses  as 
given  in  Illustration  No.  93  is  not  the  same  as  that  given  on  the  income  tax  return;  these  changes 
are  explained  in    §  375. 

§  373.  Corporation  Income  Tax  Return.  Every  corporation  is  required  to 
pay  tax  on  its  annual  net  income.  The  method  of  ascertaining  its  net  income  is  ex- 
plained in  Section  239  of  the  192 1  Revenue  Act.  The  income  tax  return  submitted 
by  the  corporation  is  signed  by  two  officers  of  the  corporation,  usually  the  president 
and  treasurer. 

Illustrations  Nos.  168-171  show  the  front  and  back  of  both  sheets  of  the  income  tax  return 
prepared  for  a  corporation.  The  information  in  this  return  is  obtained  from  the  Balance  Sheet 
and  Statement  of  Profit  and  Loss  in  Illustrations  Nos.  130  and  131. 

§  374.  Explanation  of  Illustrations  Nos.  160  and  161.  W.  A.  Gordon 
operates  a  retail  grocery  business.  His  profits  from  the  operations  of  this  business 
are  shown  in  the  illustration  on  page  366.  In  addition  to  his  income  from  the 
grocery  business,  Mr.  Gordon  has  received  $300.00  salary  from  the  Peoples'  In- 
surance Company  for  services  as  a  member  of  the  board  of  directors,  $47.50  divi- 
dend on  one  share  of  stock  in  the  Citizens  Building  and  Loan  Association,  and  $25.50 
interest  on  a  Liberty  Bond  which  he  owns;  his  traveling  expenses  in  connection 
with  attending  board  meetings  were  $30.00,  the  taxes  on  his  home,  $35.50,  and 
his  contributions  to  charity,  $50.00.     The  dividend  and  income  from  interest  on 


366 


APPENDIX  C 


the  Liberty  Bonds  are  not  shown  in  Illustration  No.  i6o  because  this  income  received 
by  Mr.  Gordon  is  exempt  from  taxation.  The  $30.00  expenses  in  connection 
with  obtaining  the  salary  of  $300.00  is  deducted  because  $270.00  is  the  net  income 
received.  The  taxes  paid  by  Mr.  Gordon  and  contributions  to  charity  are  deducted 
from  his  net  income  because  they  are  authorized  deductions. 

The  illustration  below  shows  the  Statement  of  Profit  and  Loss  prepared  from  the  income  and 
cost  accounts  in  the  ledger 

W.  A.  GORDON 
Statement  of  Profit  and  Loss,  August  31,  IQ22 


Returns  from  Sales: 

Gross  Sales 

Deduct  Sales  Returns 

Net  Sales 


Cost  of  Mdse.  Sold: 

Mdse.  Inventory  9/1 /21 500.00 

Add  Purchases 11 ,026.85 


Less  Purchases  Returns. 


11,526.85 
85.40 


of  W.  A.  Gordon  at  the 
close  of  business  August  31, 
1922.  The  transactions  com- 
pleted by  W.  A.  Gordon 
during  the  first  two  months 
during  which  he  operated 
his  grocery  business,  are 
given  in  the  Model  Set, 
Chapter  VL  A  Statement 
of  Profit  and  Loss  prepared 
by  his  bookkeeper  at  the 
conclusion  of  the  first  two 
months  is  given  in  Illus- 
tration No.  42;  the  state- 
ment at  the  right  is  in  the 
same  form  but  the  amounts 
are  different  because  it  shows 
the  costs  and  income  and  the 
net  profit  for  twelve  months. 
All  the  information  needed  in 
connection  with  the  prepara- 
tion of  the  income  tax  return 
may  be  obtained  from  the 
Statement  of  Profit  and  Loss, 
but  it  is  usually  necessary  to 
analyze  some  of  the  operat- 
ing accounts  in  order  to  show 
certain  facts  in  regard  to  the 
cost  of  operation.  In  Illustration  No.  161  the  expenses  are  distributed  as  rent,  taxes, 
salaries,  delivery  cost,  advertising,  and  miscellaneous;  this  distribution  is  obtained  from 
sis   of   the   Expense   account. 


Net  Purchases  Cost 

Less  Mdse.  Inventory  8/31/22. 


Net  Cost  of  Mdse.  Sold. 
Gross  Profit  on  Sales.  . . 


Operating  Cost: 
Expense 


Net  Profit. 


1 1. 44 1 45 
1,477-15 


15,275.80 
101.92 


15.173- 


9,964-30 


5,209.58 
2,039.90 


3. T 69.68 


msurance, 
an   analy- 


§  375.  Explanation  of  Illustrations  Nos.  164  and  165.  The  business 
operated  by  C.  W.  Keeland  &  Co.  is  owned  by  C.  W.  Keeland  and  A.  D.  Munson. 
The  results  of  operating  the  business  during  the  year  ending  December  31,  1922 
are  shown  by  the  Statement  of  Profit  and  Loss  (Illustration  No.  93).  The  facts 
shown  on  the  income  tax  return  are  the  same  as  those  shown  on  the  Statement 
of  Profit  and  Loss  except  that  some  of  the  expenses  are  analyzed.  The  salary  paid 
one  partner  ($1,200.00)  was  debited  to  Selling  Expense  and  the  salary  of  the  other 
partner  ($1,200.00)  was  debited  to  Administrative  Expense,  but  salaries  paid 
partners  must  be  shown  as  a  separate  item  on  the  return.  Purchases  discount  is 
deducted  from  the  net  cost  of  goods  purchased,  and  sales  discount  from  the  net 
sales,  instead  of  being  shown  as  non-operating  income  and  cost.  The  adjustment 
on  page  2  of  the  return  is  necessary  because  the  partnership  paid  a  fine  of  $25.00 
(which  was  debited  to  Selling  Expense)  for  one  of  its  drivers  who  exceeded  the 
speed  limit,  but  this  cannot  be  deducted  as  an  expense  on  the  return  because  it 
is  one  of  the  costs  which  are  not  deductible.  Each  partner  will  be  required  to 
show  his  share  of  the  net  income  on  his  individual  income  tax  return,  which  will 
be  prepared  in  the  same  form  as  that  for  W.  A.  Gordon,  pages  367  and  368,  except 
that  the  income  received  by  each  wull  be  entered  as  Item  3  instead  of  Item  5. 


The  purpose  of  illustrating  a  partnership  income  tax  return  is  to  show  the  student  that  the 
information  desired  by  the  Government  is  obtained  from  the  Statement  of  Profit  and  Loss  and  not 
to  explain  the  technicalities  of  the  income  tax  law.  The  student  should  compare  the  above  infor- 
mation with  Illustrations  Nos.  164  and  165  and  the  instructions  in  Illustrations  Nos.  166  and  167. 


APPENDIX  C 


367 


FILE  RETURN 

WITH  THE 

COLLECTOR  OF 

INTERNAL 

REVENUE  FOR 

YOUR  DISTRICT 

ON  OR  BEFORE 

MARCH  15,  1922 


INDIVIDUAL  INCOME  TAX  RETURN 

FOR  NET  INCOMES  OF  NOT  MORE  THAN  $5,000 
For  Calendar  Year  1921 

Or  for  periid  begun  Sept .    1 ,  _  1921  a„j  e„j^ , Aug ..    31.,..  .19S2 

PRINT  NAME  AND  ADDRESS  PLAINLY  BELOW 

^.  :..A.'....?9^A9R!... 

(Nanio.) 

6p5.J'Iain..St?.?et,. 


(Street  and  utjmbor  or  rural  route.) 
(Post  office.) 


(Cnunty.) 


.Ohio.-.., 

(State.) 


OCCUPATION,  PROFESSION,  OR  KIND  OF  BUSINESS  ■PQ.1??:J-l-..^?P°Q^y- 


D«  Ml  wille  in  lk!s  sjiau 


FIHST  PAYMENT 


(Caililcr'a  Stimp) 


CASH     CHECK     M.  O. 


Euotncd  kr 


Stein- 

13 

E.pUil  in 
S<baU« 

(Mi'  2) 

14 

IS 

A 

16 

B 

17 

C 

18 

D 

19 

20 

21 

22 

E 

23 

F 

24 

F 

25 

F 

INCOME. 

1.  Salaries,  Vfagea,  CommiaBions,  etc.  Amoun!  Eipmea 

(StQtondmeaoaaddreas  of  i>erson  from  whom  received.)  received.  jiaid. 

Peoples  Insurance  .0.9.5153:^;?....  $..?P.P..*..QP....  $-....?P..?..Q.Q.. 
...l^M.MO^.A.-.P.k?:.?..!... -- _. 

2.  Interest  on  Bank  Deposits,  Notes,  Mortgages,  and  Corporation  Bonds 

3.  Income  from  PartnersliipB,  Fiduciarios,  etc.     (Stato  name  and  address  of  partnerships,  etc.) 


270 


4.  Rents  and  Royalties 

5 .  Profit  (or  loss)  from  Btisiness  or  Profession  (not  including  income  from  partnerships). 

C.  Profit  (or  loEB)  from  Sale  of  Real  Estate 

7.  Profit  (or  loss)  from  Sale  of  Stocks,  Bonds,  etc 


8.  Other  Income  (except  dividends  from  domestic  corporations  and  iatcrest  on  obligations  cit  tho 
U.S.)    (State  nature  of  income) 


(fc)-. 


3169 


00 


68 


9.  Total  Income  in  Items  1  to  8  (less  losses  shown  above,  if  any). 

DEDUCTIONS. 

10.  Interest  Paid  (not  including  interest  deducted  above) 

11.  Taxes  Paid  (not  including  taxes  deducted  above)   

12.  Losses  by  Fire,  Storm,  etc _ 

13.  Contributions _ _ 

14.  Bad  Debts  (not  including  bad  debts  deducted  above) 

15.  Other  Deductions  Authorized  by  Law _ 

16.  Total  op  Items  U)  to  15 _ 

17. Taxable  Net  Income  (Item  9  minus  Item  16) 


.35 
50 


3439 


85 


3354 


68 


.50 
18 


COMPUTATION  OF  TAX. 


18.  Net  Income  (Item  17  above) 

19.  Lees  Personal  Exemption  and  Credit 

for  Dependents _ 


:3354 


2900 


454 


20.  Balance  (Item  18  minus  Item  19) . 

Checks  will  be  accepted  if  payable  at  par  at  Collector's  Office. 


18 


21.  Tax  Due  (i%  of  Item  20).. 


22.  Less:  Tax  Paid  at  Source |$.. 

23.  l.icjmo  una   proOU  I 


24.  Balance  Due  (Item  21  minus  22  and  23). 

25.  Tax  Paid  when  Filing  Return 


18    17 


18 


$. — 


11 


18    17 


Illustration  No.  160,  Page  i  of  Individual  Income  Tax  Return. 


368 


APPENDIX  C 


SCHEDULE  A.-EXPLANATION  OF  ITEM  4.    (Rexts  and  Royaltiei.) 

1.  Kind  of  property. 

2.  Cost,  or  March 
1, 1913,  value. 

3.  Amount 
received. 

4.  Repairs. 

5.  Depreciation 
and  depletion. 

6.  Other 
expenses. 

7.  Net  proOt 
(or  loss). 



State  estimated  life  of  property  and  how  yog  figured  depreciation  . 


SCHEDULE  B.-EXPLANATION  OF  ITEM  S.    (B. 


15173188. 
I.2OO4I2O, 


Total  Income  from  Business  or  Profession  ...Gr  0  3 .3..  S  al  6  3..  J 1  S.j  2  75  ..  8  0  — R  

Total  Business  Expenses  (state  specifically,  see  InstrucUon  IC)  -M.^5^.A.j:#.?.i.?.ii?..t.V.Q.i...E.?P.?.Il.?.?....$.§a.y.?.?./^ 

Kit  PEoriT  (oe  Loss)  (If  profit  is  less  than  usual,  explain) 

Explanation  of  business  expenses..lLeJ...I)]irG  has  e.3...|  11.,  441 

Rent   |780  .00  ,    taxes  J7.5  ^BO,    insura^^^ 


.3169J.68. 


ery  cost   ^100. 

00,..adv9 

rtising.. 

_$50,00.,_. 

misce 

llaneous 

..t84.-.40.. 

SCHEDULE  C.-EXPLANATION  OF  ITEM  6.    (Sale  of  Real  Estate.) 

1.  Kind  of  property. 

2.  Date 
acquired. 

3.  Amount 
received. 

4.  Cost. 

5.  March  1, 1913, 
value. 

6.  Subsequent 
improvements. 

7.  Depreciation. 

8.  Net  profit 
(or  loss). 



If  not  acquired  by  purchase,  state  how  acquired  . 


SCHEDULE  D.-EXPLANATION  OF  ITEM  7.    (Sale  of  Stocl. 

Stipends,  etc.) 

1.  Kind  of  property. 

2.  Date 
acquired. 

3.  Cost. 

4.  March  1,1913, 
value. 

5.  Amount 
received. 

6.  Net  profit 
(or  loss). 



If  not  acquired  by  purchase,  state  how  acquired 


SCHEDULE  E.-EXPLANATION  OF  ITEM  12.    (Lo>M>  by  Fi 

e.  Storm, 

etc.) 

1.  Kind  of  property. 

2.  Cost,  or  March 
1, 1913,  value. 

3.  Depreciation 
previously  taken. 

4.  Salvage  value. 

5.  Insurance. 

6.  Net  loss. 

1 

SCHEDULE  F.-EXPLANATION  OF  DEDUCTIONS  CLAIMED  IN  ITEMS  1,  13,  14,  and   IS.) 

J.tem__l.: t?ave.ling  exjjenses.  in^^^ 

LteiP...!.?.: -Q.o^Jt?^i^.l^Jt.ipn3..Jp...Cpffm^^^  


1.  Are  you  a  citizen  < 


2.  If  you  filed  a  return  for 


States? tSj?...    oflSce  was 

4.  Was  a  separate  If  so,  state:  (J)  Name  and  address 

return  filed  by  your      TTfi  (a)  Exemption  entered  at  head  of 

i,„oKoT,.i  „,  n,!/.?  i>  ^ claimed,  I that  return 


3.  Is  this  a  joint 
return  of  husband 
and  wife? 


husband  or  wife?  . 

6.  Were  you  married  and  living  with  husband      V  q  o  6.  If  not,  were  vou  on  the  last  day  of  your  taxable  period  sunporting  one  or  more  persons 

or  wile  on  the  last  day  ol  your  taxable  period? ji.y.S? living  in  your  household  who  are  closely  related  to  you  by  biood,  marriage,  or  adoption? 

One   child 


.Ko. 


7.  How  many  dependent  persons  (other  than  husband  or  wife)  under  IS  years  of  age  or  incapable  of  self-support  because 
mentally  or  physically  defective  were  receiving  their  chief  support  from  you  on  the  last  day  of  your  taxable  period?  . 

8.  State  amount  of  dividends  received  9.  State  amount  of  10.  State  amount  of  interest  received  on 
from  domestic  corpomtions  (including                                     Interest  received  on                                     other  obligations  of  the  United  States 

dividends  received  through  partner-         "J  QQ     QQ      Victory     Liberty           A  J      ^Q       (except  Liberty  Bonds)  on  a  principal  Ot;      t=,r) 

ships,  fiduciaries,  etc.) -  >— f:y.r„--r-„-    Loan  4}%  Notes  .-  %....^.:.,\:^.r...    in  excess  of  S5,000 „ - -,-  S. - . . !~'.?..l.^^.. 


I  SWEAB  (or  affirm)  that  this  return,  including  the  accompanying  schedules  and  statements  (if  any),  has  been  examined  by  me,  and,  to  the  best  of  my  knowledge 
and  belief,  is  a  true  and  complete  return,  made  in  good  faith,  for  the  tasable  period  as  stated,  pursuant  tothe  Revenue  Act  of  1921  aad  the  Regulations  issusd  under 
authority  thereof. 

(If  return  i»  made  by  «seot,  the  rsMOD  therefor  miut  be  Bbttcd  oa  thifl  line.) 


Sworu  to  and  subscribed  before  me  this day  of. 


(SiEcaturo  cf  iodividual  or  ogeot  } 


(Bi<n»ture  of  offictr  tdmiaielvTluz  oath.)  (Titte.)  (Addroaa  of  icdividiml  or  agent.) 

(An  amended  r*tum  must  be  plainly  nnarkad  "Amended**  aeroM  tha  face  of  the  return.) 


Illustration  No.  i6i,  Page  2  of  Individual  Income  Tax  Return. 


APPENDIX  C 


369 


INSTRUCTIONS  FOR  INDIVIDUAL  RETURN 


1.  PERSONS  REQUIRED  TO  MAKE  A  RETURN  OF  INCOME. 

An  Incorao  tax  return  must  be  flled  by  evory  citizen  of  tbo  Unitod  States 
whether  residing  at  horao  or  abroad,  and  every  person  residing  in  the  United 
States,  thoiiRh  not  a  citizen  thereof,  whose  gross  income  for  the  taxable  period 
1921  amounted  toS5,000,  or  whoso  net  income  amounted  to— 

(a)  $1,000  iisinglo  or  If  married  and  not  living  with  husband  or  wife. 
(6)  S2,000if  married  and  Uvine  with  husband  or  wife. 

If  the  combined  net  Income  of  husband,  wife,  and  dependent  minor  chil- 
dren equalled  or  exceeded  e2,000,  or  if  the  combined  cross  income  of  husband, 
wife,  and  dependen  t  minor  children  c 'Quailed  or  exceeded  $5,000  all  such  income 
must  bo  reported  ona  joint  return,  or  on  separate  returns  of  husband  and  wife. 
If  singleand  the  net  income, including  tl'.at  of  dependent  minors, il  any, equalled 
or  exceeded  jl,00U,  or  if  the  gross  Income  equalled  or  exceeded  ?5,0c"0,  a  return 
must  be  filed.  A  minor,  however,  having  a  net  income  of  $1,000  or  S2,000,  ac- 
cording to  the  marital  status,  or  a  gross  income  of  $5, 000,  must  file  a  return. 

Under  each  of  the  above  conditions,  a  return  must  be  filed  even  though 
Rotaxlsdue.  Nolo  especially  Instruction  8,  "Credits  for  Personal  Exemp- 
tion and  Dependents.". 

The  income  of  a  minor  or  incompetent,  if  derived  from  a  separate  estate 
under  control  of  a  guardian,  trustee,  or  other  fiduciary,  must  be  reported  by  his 
guardian  or  otberleeal  representative. 

Income  of  (a)  estates  of  decedents  before  final  settlement;  (6)  trusts,  whether 
created  by  will  or  deed,  for  unasrertained  persons  or  persons  with  contingent 
interests;  or  income  held,  or  which  underthetermsof  the  will  or  trust  may  bo 
held,  for  future  distribution,  is  taxed  to  the  fiduciary  as  a  single  person,  except 
that  from  the  income  of  an  estaf  e  there  may  first  be  deducted  any  amount  prop- 
erlv  paid  or  credited  to  beneficiaries. 

If  the  net  income  of  a  decedent  from  the  bet^inning  of  the  taxable  period 
to  the  date  of  his  death  was  $1 ,000,  if  unmarried .  or  S2,000,  i  f  married  and  living 
with  wife  or  husband,  or  if  the  gross  income  was  25,000  or  over,  the  executor  or 
administrator  siiall  file  a  return  on  Form  1010  or  i040A  for  Buch  dcccdout. 

2.  WHEN  TO  USE  FORM  1040  INSTEAD  OF  THIS  FORM. 

You  must  file  vour  return  on  Form  104O— 

(a )  If  the  combined  net  ijicome  of  husband  and  "wife  exceeds  S5,C90. 

(b)  If  vour  net  income  exceeds  J5,iX>0. 

(c)  If  tho  net  inoome  reported  in  this  return  e:xCGcd3  $4,000  and  the  entire 
family  exemption  hae  been  claimed  in  a  separate  return  filed  by  husband 
or  wife. 

(d)  It  tho  return  is  filed  for  a  period  of  loss  than  one  year  and  the  net  income 
when  placed  on  an  annual  basis  exceeds  $5,000.    (3eo  Instruction  3  bolcw.) 

3.  PERIOD  TO  BE  COVERED  BY  RETURN. 

Your  return  must  bo  filed  forthecalecdrtrycarendlnf;  December  31, 1921. 
orforthefiscalvearendingon  the  last  day  of  any  month  other  than  December. 
The  dates  on  which  the  period  covered  by  the  return  begins  and  ends,  if  other 
than  a  calendar  year,  must  b«  plainly  stated  at  the  head  of  the  return. 

You  were  required  to  fila  your  return  for  1018  on  the  basis  of  your  annual 
sccotinting  period.  Ha\'inpestablishedan  accounting  period  for  191SthiEpsriod 
must  be  adhered  to  for  subsatjuent  years,  unless  permission  was  received  from 
theCommiseicner  tomakoachange.  !n  the  case  of  a  return  for  a  period  of  less 
than  one  year,  tho  net  income  Bha  Jibe  placed  on  an  annual  basis  by  multiplying 
the  amouh  t  thereof  by  twelve  and  di\'iding  by  tho  number  of  months  included 
in  such  period;  andtho  tax  shall  besuch  part  of  a  tax  computed  on  such  annual 
basis  as  the  number  of  months  in  such  period  is  of  twelve  months. 

4.  ACCRUED  OR  RECEIVED  INCOME. 

If  your  books  of  account  ara  kept  on  an  arcrual  basi*;,  report  all  income 
accrued,  even  thouch  it  has  not  been  actually  received  or  entered  on  tho 
books,  and  expenses  incurred  instead  of  expenses  paid. 

If  your  books  do  not  show  income  accrued  and  expenses  incurred,  report 
all  income  received  or  constructively  received,  such  as  bank:  interest  credited 
to  your  account,  and  eipense«  paid. 

S.  INSTALLMENT  SALES. 

If  you  have  tised  the  in<itallment  method  in  computing  income  from  In- 
stallnicnt  sales  you  must  attach  to  vour  return  a  schedule  showint;  separately 
for  the  vear.s  1918,  1919,  1020,  and  iOl'l  the  following  information:  (a)  Gross 
pales;  (b)  cost  of  goods  sold;  (c)  gross  profals;  (d)  percentage  of  profits  to  gross 
sales;  (e)  amount  collected;  (/)  cross  profit  on  amount  collected. 

€.  ITEMS  EXEMPT  FROM  TAX. 

The  following  Items  are  exempt  from  Federal  income  tax  and  should  not 
be  reported,  unless  it  is  desired  to  estabUsh  a  net  loss,  in  which  case  see  Section 
204  of  the  Revenue  Act  of  1921: 

(a)  The  proceeds  of  life  insurance  policies  paid  upon  the  death  of  the  insured; 

(6)  The  amount  received  by  the  insured  as  a  return  of  premium  or  premiiuns 
paid  by  him  under  Life  insurance,  endowment,  or  annuity  contracts,  cither 
during  the  term  or  at  the  maturity  of  tho  term  mentioned  In  the  contract  or 
upon  surrender  of  the  contract; 

(c)  Gifts  (not  made  as  a  consideration  for  service  rendered),  and  money  and 
property  acquired  under  a  will  or  by  inheritance  (but  tho  incomo  derived  from 
money  or  property  received  by  gift,  will,  or  inheritance  is  taxable  and  must  be 
reported); 

(d)  Interest  upon  (1)  the  obli^tions  of  a  .Stat6,  Territory,  or  any  poUtical 
subdivision  thereof,  or  the  District  of  Columbia;  or  (2)  securities  issued  under 
the  provisions  of  the  Federal  Farm  Loan  Act  of  July  17,  1916;  or  (3)  cho  oblipa- 
tions  of  the  United  States  or  its  possesiiions;  or  (4)  bonds  issued  by  the  War 
Finance  Corporation.  In  the  case  of  obligations  of  the  United  States  issued 
alter  Septemoer  1,  1917  (other  tlian  postal  savings  certificates  of  deposit),  and 
in  the  case  of  bonds  issued  by  the  War  Finance  Corporation,  tho  interest  is 
exempt  only  if  and  to  the  extent  provided  in  tho  respective  acts  authorising 
the  issue  thereof  as  amended  and  supplemented  by  Section  1328  of  tbo  Revenue 
Act  of  1921,  and  should  be  excluded  from  ^oss  income  only  if  and  to  the  extent 
it  is  wholly  exempt  to  the  taxpayer  from  income,  war  profits,  and  excess  profits 
taxe*;; 

(r)  Amounts  received  through  accident  or  health  in^rurance  or  under  work- 
men's compensation  acts,  as  compensation  for  personal  injuries  or  sickness,  plus 
the  amount  uf  any  damages  received,  whether  uy  suit  or  agreement,  on  accoujit 
of  such  Injuries  or  sickness;  3_i  1^2 


if)  Amounts  received  as  componsatlon,  family  allotments  and  allowances 
under  tho  provisions  of  tho  War  Risk  Insurance  and  tho  Vocational  Rehabilita- 
tion Acts,  or  as  pensions  from  the  United  States  for  ser\'ice  of  tho  beneficiary 
or  another  in  tho  military  or  naval  forces  of  tho  United  States  In  time  of  war- 

(?)  Tho  rental  valuo  of*a  dwelling  houso  and  appurtenances  thereof  furnished 
to  a  minister  of  the  posnel  as  part  of  his  cornpcnsatio 


7.   FARMER'S  INCOME  SCHEDULE. 


end  attach  to  this  return,  Form  1040  F,  Schedule  of  i^arm  Income  and  Expenses. 
Koter  the  net  farm  income  as  Item  5,  pace  1  of  tho  return.  If  your  farm 
books  of  account  are  kept  on  an  accrual  basis,  the  Cling  of  Form  1(M0F  Is  optional. 


8.  CREDITS  FOR  PERSONAL  EXEMPTION  AND  DEPENDENTS. 

If  you  wcro  married  and  living  %\ith  your  husband  or  wifo  or  were  head 
of  a  family  ou  the  last  day  of  your  taxable  period,  you  may  subtract  from  your 
net  income  on  Form  1040.\,  before  calculating  your  normal  tax,  an  exemi'tion 
of  ??,500,  plus  5100  for  each  person  (other  than  luir.oand  or  wife)  under  is  years 
of  age  or  incapable  of  .self-sunport  becausementally  or  physically  dti'tviive,  uho 
was  receiving  his  chief  support  from  you  on  that  date.  If  htr  1> :  1  :■  1  .  if  - 
make  separate  returns,  the  exemption  of  $2,500  may  be  claimed  1  ,  '■    1   ii 

not  by  both)  or  may  bo  divided  between  them,  but  tho  exemt  M  i  -.  ■  '  r 
eachdcpendent  may  be  claimed  only  by  the  person furnisliing  the  <  ;  i- 1    n  i    ,  t. 

If  you  were  not  married  or  did  not  live  with  husband  or  wilu  and  were 
not  head  of  a  family  on  the  last  day  of  your  taxable  period,  you  areeniitled  to 
a  personal  exemption  of  $1,000  plus  S400  for  each  dependent  person  under  18 
yeara  oiago  or  incapable  of  self-support  because  mentally  or  physically  defoc- 
live,  who  waarcceiving  his  chief  support  from  you  on  that  date. 

An  exemption  of  $1,000  may  be  claimed  in  cases  where  Form  I040Ais  filed 
forestatesin  process  ofadministration,  or  with  respect  to  income  held  for  future 
distribution. 

If  by  reason  of  a  chango  in  your  accounting  period  a  return  is  filed  for 
part  of  a  year,  the  personal  exemption  and  credit  for  dependents  may  be  claimed 
:n  accordance  with  your  status  on  the  last  day  of  such  taxable  period.  (See 
alsoImtructionSon  this  page.) 

A  "head  offamily"  is  a  person  who  actually  supports  one  or  more  persona 
living  in  his  (or  her)  houseliold,  v/ho  are  closely  telated  to  him  (or  her)  by  blood, 
marriage,  or  adoption. 

9.  AFFIDAVIT. 

The  afBdavit  must  be  execulod  by  the  person  whose  income  Is  reported 
unless  he  is  a  minor  or  incompetent,  or  unless  he  is  ill,  absent  from  the  country, 
or  otherwiso  incapacitated,  in  s/hich  case  the  legal  representative  or  agent  may 
execute  the  affidavit.  A  minor,  however,  making  his  owu  return,  must  execute 
tho  affidavit. 

The  oatli  will  be  administered  without  chargo  by  any  collector,  deputy 
collector,  orintcraalrevenuoagent,  or  (if  you  arc  in  the  miHtary  or  naval scrvioo 
oltho  Unilod.Statcs)by  any  military  or  naval  officer  who  is  authorized  to  admin- 
ister oaths  for  purposes  of  miUtary'or  naval  justice  and  administration.  If  an 
internal  revenue  onioer  is  net  available,  the  return  should  be  sworn  to  before  a 
notary  public,  justico  of  the  peace,  or  other  person  authorized  to  administer 
oaths. 

10.  WHEN  AND  WHERE  THE  RETURN  MUST  BE  FILED. 

If  thercturnisfor  the  calendar  year  1921,fiIoit  with  the  Collector  of  Internal 
Revenue  for  the  district  in  which  ycu  U  vc  or  have  your  principal  plice  of  business 
on  or  before  March  15,  19.?2.  If  for  a  period  oilier  than  tno  calendar  year,  the 
relurnshould  be  filed  ou  or  bcforo  the  15th  day  of  the  linrd  month  following  tho 
close  of  such  period. 

In  case  tho  taxpayer  had  no  legal  residence  or  place  of  business  in  the 
United  States,  the  return  should  bo  forwarded  to  the  Collector  of  Internal  Reve- 
nue, Baltimore,  ild. 

If  the  address  of  the  collector  is  not  printed  on  the  return  and  you  do  not 
know  it,  ask  at  the  post  offioe  or  bank. 

I!,  WHEN  AND  TO  WHOM  THE  TAX  MUST  BE  PAID. 

The  tax  should  bo  paid,  if  possible,  by  sending  or  bringing  with  the  return 
a  check  or  money  order  drawn  to  tho  order  of  *'  Collector  of  internal  Revenue 
at  (insert  name  of  city  and  State)." 

Do  not  send  cash  through  the  maU,  or  pay  it  in  person,  except  at  the  office 
oftho  collector. 

The  tax  may  be  paid  in  four  equal  installments  as  follows:  The  first  install- 
ment shall  be  paid  at  the  time  fi\ed  by  law  for  filing  the  return,  the  second 
installment  shall  be  paid  on  the  1  jthdav  of  thethird  month,  tho  third  installment 
on  tho  iothday  oftliesLxth  month,  arid  thefoiu-thinstallmeut  on  the  15th  day 
of  I  ho  ninth  month  after  tho  time  fixed  bylaw  for  fiUng  tho  return. 

Tho  total  tax  may  be  paid  at  the  time  of  filingthcreturn.orif  not  sopald, 
one  installment  must  be  paid  and  the  balance  may  bo  paid  in  installments,  or 
in  full,  on  or  prior  to  any  subsequent  installment  date  referred  toabove.  Failure 
to  poy  any  installment  on  the  ditc  £-\ed  bv  law  makes  the  taxpayer  liable  for  the 
payment  of  the  balance  of  lax  duo  upon  notice  and  demand  by  tho  collector. 

12.  PENALTIES. 

For  Mji!ane  False  or  Fraudulent  Returns. 

Not  Rxceeding  $10,000  or  not  exceeding  one  year's  imprisonment,  or  both, 
in  the  discreiion  of  tho  couit,  and,  in  addition,  M  per  centum  of  the  tax  evaded. 

For  Failingr  to  Make  Return  on  Time. 

Not  mote  than  $1,000,  and,  in  addition,  25  per  centum  of  the  total  tax. 

For  Failing  to  Poy  Tax  Wlion  Due,  or  Understatement  of  Tax  Through 
Negligence,  etc. 

Five  per  cent  of  the  lax  duo  but  unpaid,  plus  Interest  &t  the  i-ale  of  1  per 
centum  per  month  during  tbo  period  in  which  It  remains  unpaid. 


Illustration  No.  162,  Page  i  of  Instructions  for  Individual  Return. 


370 


APPENDIX  C 


13.  INCOME  FROM  SALARIES,  WAGES.  COMMISSIONS,  ETC. 

Report  all  salajie"?  or  other  compensation  credited  hy  or  received  from 
outside  sources,  and  any  salaries  included  as  a  deduction  in  Item  5  for 
(o)  yourself,  (6)  your  wife  (or  husband),  if  a  joint  return  is  Hied,  and  (c)  each 
dependent  minor  child  having  a  net  income  of  less  than  $1,000  per  annum. 
Use  a  separate  line  for  each  entr^-,  f:i^ing  tho  information  recjussted. 

Any  amount  claimed  as  a  deduction  for  necessary  expenses  against  salaries, 
etc.,  should  be  fully  explained  in  Schedule  F,  page  2  of  the  return,  or  in  an 
attached  statement. 

Traveling  eipense^(including  the  entire  amount  expended  lor  meals  and  lodg- 
ing) while  away  from  home  in  the  pursuit  of  a  trade  or  business  are  deductible. 

14.  INCOME  FROM  PARTNERSHIPS.  FIDUCIARIES.  ETC 

Report  your  share  {whether  received  or  not)  in  tho  profits  of  a  partner- 
ship or  personal  service  corporaUon,  or  in  the  income  of  an  estate  or  trust, 
except  the  part  of  such  share  that  consisted  of  dividends  on  stoct  of  domestic 
corporatious,  and  taxable  interest  on  obligations  of  the  United  8tates,  vrhich, 
should  be  included  in  Items  R,  9,  and  10,  at  foot  of  page  2  of  tht  return. 

Report  in  Item  1,  salary  received  from  a  partnership  or  personal  service 
corporation. 

If  the  taxable  period  on  the  basis  of  wliich  you  file  your  return  fails  to 
coincide  with  the  annual  accounting  period  of  the  partnership,  personal  service 
corporation,  or  fiduciary,  then  you  snould  include  in  your  return  your  dis- 
tiibutive  share  of  tho  total  not  income  for  such  accounting  period,  ending 
within  your  taxable  period. 

15.  INCOME  FROM  RENTS  AND  ROYALTIES. 

If  you  received  property  or  crops  in  lieu  of  cash  rent,  report  the  income  as 
though  the  rent  had  been  received  in  cash.  Crops  received  as  rent  on  a  crop- 
share  basis  should  bo  reported  as  income  for  the  year  in  wtiich  disposed  of 
(unless  your  rGtum  shows  income  accrued). 

Explain  in  Schedule  A,  repairs,  depreciation,  depletion,  and  other  expenses. 

Other  expenses  include  interest,  taxes,  fire  insurance,  fuel,  light,  labor,  and 
other  necessary  expenses  of  this  character. 

16.  INCOME  FROM  BUSINESS  OR  PROFESSION. 

Report  in  Item  5  income  from— 

(a)  Sale  of  merchandise,  or  of  products  of  raanulacturing,  construction,  min- 
ing, an<l  agriculture. 

(o)  Business  service,  such  as  transportation,  storage,  launderinR,  hotel  and 
restaurant  service,  livery  and  parage  service,  etc.,  if  you  owned  the  business. 
If  vou  areonly  an  employee  of  a  business,  report  your  salary  or  wages  in  Item  1. 

(c)  A  profession,  such  as  medicine,  law,  or  dcntistrv',  if  "you  practiced  it  on 
vour  own  account.  If  you  were  employed  on  a  salary,  report  your  salary  in 
Item  1. 

In  general,  report  in  Item  5,  any  income  in  the  earning  of  which  you  in- 
curred expenses  for  labor,  rent,  etc. 

If  you  are  a  farmer  (or  a  farm  ov/ner  renting  your  farm  to  another  person  on 
shares),  see  Instruction  7. 

-  Describe  the  business  or  profc.'^sion,  as  "grocery,"  "retail  clothing,"  "drug 
store,"  "latradry,"  "doctor,"  "lawyer,"  "farmer,"  etc. 

Report  the  total  income  derived  fromsales  or  from  services,  less  any  discounts 
or  allowances  from  the  sale  price  or  service  charge.  (For  instalhnent  sales  see 
Instructions.) 

"Total  Business  Kxpense"/'  include:  (1)  cost  of  goods  sold,  which  la  usually 
obtained  by  adding  to  tho  inventory  at  tho  beginning  of  the  year  the  mer- 
chandise and  supplies  purchased  during  the  year,  and  deducting  from  this 
sum  tho  inventory  at  the  end  of  the  year;  (2)  business  expenses,  wbicli  inclucfo 
all  ordinary  and  necessary  business  expenses  not  classified  above,  such  as 
office  wages,  rent,  heat,  light,  and  traveling  expenses  (see  Instruction  13); 
(3)  repairs,  wear  and  tear,  ob.-ioleicence,  depletion,  and  property  losses  (other 
than  merchandise),  .*^uch  as  (a)  ordinary  repairs  required  to  keep  property 
In  usable  conditon,  (6)  reasonable  allowance  for  exnaustion,  wear  and  tear 
of  property  used  in  the  trade  or  business,  including  a  reasonable  allowance  for 
obsolescence,  and  (c)  losses  of  businessproperty  by  fire,  storm,  or  other  casualty, 
or  theft,  not  compensated  for  by  insurance  or  otherwise  and  not  made  good  by 
repairs  claimed  as  deductions;  and  (4)  bad  debts,  or  portions  therrof,  arising 
from  sales  or  professional  services  that  have  been  reported  as  income,  which 
have  been  deilnitelv  ascertained  to  be  "worthless  and  charged  ofl  within  tho 
year,  or  such  reasonable  amount  as  has  been  added  to  a  reserve  for  bad  del>te 
within  the  year.  A  Utbt  previously  charged  oQ  as  bad.  if  subsequently  col- 
lected, must  be  returned  as  income  for  the  year  in  which  coUected.  Explain 
these  deductions  under  Schedule  B,  page  2  of  the  return. 

Do  not  Include  cost  of  business  etiuipment  or  furniture,  expenditures  for 
replacements  or  for  permanent  improvements  to  property,  or  personal  living 
or  family  expenses,  nor  any  deduction  for  Uepreciatioii  in  the  value  of  a  build- 
ins  occupied  by  you  as  a  dwelling,  or  of  other  property  held  for  personal  Use. 

If  Item  5  shows  a  deficit,  indicate  by  using  red  ink  or  a  minus  sign, 

17.  PROFIT  FROM  SALE  OF  REAL  ESTATE. 

Describe  tho  property  briefly,  as  "ferm,"  "house,"  "lot." 
State  the  actual  consideration  or  price  received,  or,  in  case  of  an  exchange, 
the  fair  market  value  of  the  property  received. 


Enter  the  original  cost  of  the  property,  and  if  it  was  acquired  prior  to 
March  1,  1913,  the  fair  market  value  on  that  dato.  Attach  statement  explain- 
ing how  value  at  March  1,  1913,  was  determined.  Expe'isosinciclentn.lto the 
purchase  may  Be  included  in  the  cost  if  never  claimed  in  income  tax  returns 
as  deductions  from  income. 

Enter  as  depreciation  the  amount  of  vrcxr  and  tecu-  and  obsohscence,  or 
depletion,  sustained  since  March  1, 1913  (or  since  date  of  acquisition,  if  sub- 
sequent to  March  1,  1913). 

In  case  the  property  was  acquired  by  gift,  bc-nuest,  devise,  or  inheiitanco 
after  March  1, 1913.  or  in  any  manner  prior  to  that  date,  see  Section  202  of  the 
Revenue  Act  of  1921. 

If  the  net  result  t<(  bo  entered  In  Item  6  is  a  deductible  loss,  indicate  the 
deficit  by  using  red  ink  or  a  minus  sign. 

18.  PROFIT  FROM  SALE  Of  STOCKS,  BONDS,  ETC. 

Tho  method  of  computation  and  the  information  to  ba  submitted  in  the 
case  of  sales  of  stocks,  bonds,  etc.,  is  similar  to  that  required  for  Item  C, 
except  that  subsequent  improvements  and  depreciation  are  not  involved.  The 
profit  (or  loss)  should  be  computed  in  accordance  with  Instruction  17  above. 

19.  OTHER  INCOME. 

Report  all  other  taxable  income  for  which  no  place  is  provided  elsewhere 
on  page  1  of  the  return,  including  dividends  reci'ivcd  on  stock  of  foreign  cor- 
poratious.  Dividends  received  on  stock  of  domestic  corporations  and  taxable 
interest  on  obligations  of  the  United  States  should  be  reported  in  Items  S,  9, 
and  10  at  the  foot  of  page  2  of  the  return. 

20.  INTEREST  PAID. 

Enter  as  Item  10  interest  paid  on  personal  indebtedness  as  distinguished 
from  business  indebtedness  (which  should  be  deducted  under  Schedules  A,  B, 
C,  or  D).  Do  not  include  interest  on  indebtedness  incurred  for  the  purchase 
of  bonds  and  other  obligations,  the  interest  on  which  is  excmi  t  from  tax, 
except  interest  on  indebtedness  incurred  to  purchase  or  carry  oblieatioas  of 
tho  United  States  issued  after  September  24,  1917,  and  originally  subscribed 
for  by  the  taxpayer. 

21.  TAXES  PAID. 

Enter  as  Item  11  personal  taxes  pnid  and  all  taxes  on  property  not  used 
In  business  or  profession,  not  including  those  assessed  against  local  benefits 
of  a  kind  tending  to  increase  the  value  of  the  property.  Do  not  include 
Federal  income  taxes,  taxes  imposed  upon  the  taxpayer  upon  his  interest  as 
lihareholdcr  or  member  of  a  corporation,  which  are  paid  by  the  corporation 
without  reimbursement  from  the  taxpayer,  nor  income  and  profits  taxes 
claimed  as  a  credit  in  Item  23,  page  1  of  the  returri. 

22.  LOSSES  BY  FIRE,  STORM,  ETC. 

Enter  as  Item  12  losses  of  property  not  connected  with  your  trade,  business, 
or  profession,  sustained  during  the  year  from  fire,  storm,  shipwreck,  or  other 
casualty,  or  from  theft,  which  were  not  compensated  for  by  insurance  or  other- 
wise. (Losses  chilmed  should  be  explained  in  Schedule  E,  on  page  2  of  the 
return.) 

Do  not  deduct  losses  incurred  in  transartions  which  v.-ero  neither  cotmectod 
with  your  trade  or  business,  nor  entered  into  for  profit. 

23.  CONTRIBUTIONS. 

Enter  as  Item  13  contributions  or  gifts  made  mthin  tho  taxable  period  to 
or  for  tho  uee  of:  (a)  tho  United  States,  any  State,  Territory,  or  any  political 
subdivision  thereof,  or  the  District  of  Columbia,  for  exclusively  public  pur- 
poses; (6)  any  corporation,  or  commimity  chest,  fund,  or  foundation,  orgam^ed 
and  operated  eiclusivelj;  for  religious,  charitable,  srit>ntilic,literary,  or  edu- 
cational purposes,  including  posts  of  the  American  Legion  or-tlie  Women's 
Auxiliary  units  thereof,  or  lor  tho  prevention  of  cruelty  to  children  or  animals, 
no  part  of  the  net  earnings  of  which  inures  to  the  benefit  of  any  private 
stockholder  or  individual;  or  (c)  the  special  fund  for  vocational  rehabilitation 
authori-'ed  by  section  7  of  tlic  Vocational  Rehabilitation  Act;  to  an  amount 
which  in  all  the  above  cases  combined  docs  not  exceed  15  per  centum  of  tho 
taxpayer's  net  income  as  computed  without  the  benefit  of  th is  paragraph . 

Fiduciaries  filing  this  return  for  estates  in  the  process  of  administration 
are  allowed,  in  lieu  of  this  deduction,  that  provided  in  Section  219  (ft)  of  the 
Revejiue  Act  of  1921.  Liiit  names  of  organizations  and  amounts  contributed  to 
each  in  Schedule  F. 

24.  BAD  DEBTS. 

Enter  as  Item  14  all  "bad  clebts  other  than  those  claimed  as  a  deduction 
in  Items  above.  State  in  Schedule  F  (a)  of  what  the  debts  consisted,  (6)  when 
they  were  created,  (c)  whe:i  they  became  due,  and  (t/)  how  they  were  actually 
determined  to  be  v/orthless. 

25.  OTHER  AUTHORIZED  DEDUCTIONS, 

If  this  return  is  filed  for  an  estate  In  the  process  of  administration,  there 


DETACH  AND  RETAIN  THIS  INSTRUCTION  SHEET  WITH  YOUR  WORKING  PAPERS. 


COVCRHUENT  PRMTtNC  OFFICE 


Illustration  No.  163,  Page  2  of  Instructions  for  Individual  Return. 


APPENDIX  C 


371 


THIS  RETURN  SHOULD 
BE  FILED  NOT  LATER 
THAN  THE  15TH  DAY 
OF  THE  THIRD  MONTH 
FOLLOWING  THE  CLOSE 
OF  THE  ACCOUNTING 
PERIOD 


PARTNERSHIP  AND  PERSONAL  SERVICE  CORPORATION  RHURN  OF  INCOME 

FOR  CALENDAR  YEAR  1922 


Do  not  ^rilc  in  this  spAC* 


Or  for  priod  begun  . 


1921,  and  ended  ,1922 


PRINT  NAME  AND  ADDRESS  PLAINLY  BELOW 

C.  W.  Keeland  &  Co. , 
(Wii<i..y 

208  Commeroe  Street. 

{8(tMt4odniimW.i 

Clnoinnatl.   Ohio. 


Data  r«c«Ivad 


KINO  OF  BUSINESS ?^.^i.l„„?®®?:..-^.J...9-?.?.l STATE  WHETHER  PARTNERSHIP  OR  CORPORATION  . 


Partnerahtp 


SCHEDULE  A-INCOME  TO  BE  ACCOUNTED  FOR  BY  MEMBERS. 


CROSS  INCOME 
.  Groaa  aalea,  less  returns  nnd  allowances - „ _ .„ l| I 26!.  4_7^ J  7  6 

.  Leas  coal  of  goods  sold,  exclusivo  of  it«me  called  loraeparat^ly  below  (attach  Schedule  A2)...|..^ I ^,P.[..g.r.y.|.g.fi- 

.  Grots  income  from  eervicoa  or  operatiooa  other  than  trading 


.  Taxable  interest  from  all  other  sources  (not  including  in 

.  Rents  .„ 

.  Royalties _ 

.  Share  of  net  iDcome  earned  by  a  partnership  or  personal  a 


manufacturing,  lesa  allowances  (attach  Schedule  A^).. 
■oferred  to  under  Items  2  and  3,  Schedule  C) 


e  corporation  (whether  received  c 


.  Dividenda  subject  to  surtax  only  (attach  Schedule  A8) „. 

.  Dividends  subject  to  both  normal  and  surtax  (attach  Schedule  A9) _ _ 

.  Other  income  (not  including  any  amount  reported  in  Item  23  below  nor  interest  on  Liberty  Bonds)  (atuch  Schedule  AlO).. 

Total  op  Items  1  to  10 _ , 

DEDUCTIONS  ] 

.  Expenses  (except  amouots  reported  in  Item  2  above,  or  called  for  separately  belowj  (attach  Schedule  A12) $... 

.  Compensation  of  partnera  or  stockholders  in  whatever  form  paid  (attach  Schedule  A13) ' 

.  Repairs  (including  labor,  supplies,  etc.)  (attach  Schedule  A14) „ _ „ „ „ 

.  Interest  (attach  Schedule  A15) __ _ „ < 

.  Taxes  (attach  Schedule  A16) „ „ | 

.  Bad  debts  (attach  Schedule  A17) „ L .. 

.  Exhaustion,  wear  and  tear  (including  obsoleecence)  (attach  Schedule  A18) _ 

.  Depletion  (attach  Schedule  A19) _ .... 

.  Amortization  of  War  facilities  (attach  Schedule  A20) I 

ToTAi,  OF  Items  12  to  20 _ 

Item  11  hinds  Item  21 _ „ „ 

.  Profit  or  lose  en  salee  of  capital  assets  and  miscellaneous  investments  (attach  Schedule  A23) —  I 

.  Losses  sustained  by  fire,  storm,  etc.  (attach  Schedule  A24).    Extend  diflerenco  between  or  sum  of  Items  23  and  24  1.: 

.  Net  Income  TO  BE  AccotjsTED  for  by  Members  fiTFM  22  mikcb  Item  24  extended) , 


Enter  below  the  ahare  of  net  income 
ons  of  the  United  States),  each  partnei 
r  corporation  to  a  foreieii  country  or 

If  the  distributable  intiyesta  in  the 


SCHEDULE  B— PARTNERS'  OR  STOCKHOLDERS'  SHARES  OF  INCOME  AND  CREDITS. 

I  (whether  distributed  r,r  not)  of  i 

's  or  stockholder's  ehsre  of  any  ir  _ 

[o  a  possession  of  the  United  States.     (See  page  1  of  Instructions,  paragraphs  9  to  14,  inclusive.) 

net  income  are  determined  on  a  basis  other  than  a  percentage  basis,  attach  an  explanatory  statement. 


c  CoaPoaiTioN. 


(1  address  of  «BCta,  u  shown  oa  lndlTtdual  tax  r 


(«)...C.^..W.^.K.?.9larld,    952  Park  Ay^^^^^^ 

(6K.A^_P.^..M\iP3A^J...814  Wajjiut  3^.        Cinciimati.J  One-half  l.„ 


2209   82 
2209 1  82 


, 4419L6.4j$ I T 


The  undersigned,  being  severally  duly  e»vtu,  ^<».>i  >ui  uA>xi<n;<i  v 
and  is  to  the  best  of  his  knowledge  and  belief  a  true  and  complete  r 
lions  issued  under  the  authority  thereof. 

Sworn  to  and  eubscribed  before  me  this day  of 


(Sltnatun  ot  offlctr  BdmlnUUrlog  oatb. ) 


Membtr  o/partntrihip. 
Tntuurtr  oj  corporation. 


Illustration  No.  164,  Page  i  of  Partnership  Income  Tax  Return. 


372 


APPENDIX  C 


SCHEDULE  C— RECONCILIATrON  OF  NET  INCOME  AND  ANALYSIS  OF  CHANCES  IN  SURPLUS. 


iteiMt  on  obUj;sU0DSOf  the  I 
Victory  Ubwtj  Loan  3i%  I 


«pt 


(o)li 


'  Liberty  L4m'3i%Not«S,&adobU^UoDS 

Ol  UOJICa  BIUICI  UOSMSSIODS — „„ 

(b)IaUrastoa  oblicatioDB  of  &Ute3,TemUirics.uid  poliUoJ  lub- 

<e)  Iat«r«toD  Farm  Coin  Bond&lssued  uadtf  Federal  Turn  Lofto 


.»  mmsd  durloe  tbe  period  b 


lisrEesifKl 


■r  bad  debts  U  lUm  IT,  Scbedola  A 


:;i:::::::::]:: 


.  ToUlof Itein3lto5,iadiulr«_ 

I.  Other  credits  U>  surplus  (to  be  d 

(6> 

.  ToUl  ot  llOBS  8  to  10,  lodiulve- 

.  ToUlfrom  18..„ „ 

>ccounUngpenod(lt«mnii.l 


TZJ 


9,  and  coDtribatlons . 


(a)  DonaUou.Kra 

(b)  Uicome  and  profits  i 

or  a  (oreVn  eouDirr — "..- - 

(0  Spedal  trnprorement  tues  tcndlcf 

property  auessed — 

(d)  Purnllor*  and  Bitures,  additions,  a 


Jolted  SUKj,  lU  pcosesslous 


(t)  Replacementi  and  rCTieirab... 


Vioorr  Liberty  I^oan  3}%  ] 
(0  Add/uDDs  to  tinUJt'i'bladVaa 


)I  any  oiSccf  or  employM  lor 

tb«  porcbase  of  bonds  and 
itucb  Is  wboUy  exampi  Irom 
Incorred  to  purtbase  or  cury 
orlcliiaily  eubscrlbfd  to  by 

Ich  en  Dot  included 'lii'itflm 

id  other  conilfifeades  (to  be 


0)  Otbar  unallowable  dedocUons  (lo  be  dMatted):       Pl^jlO 


143-9  164  I 
I    25  100 


(3)- 


1  by  balance  sheet  nt  dose 


f  property): 


.  Total  ot  Item 

(oj  iJato  pai^.' 

(6)  Dale  paid Chartctcr. 

le)  Date  paid. 


(^  Date  paid Oiaracter.. 


0  surplus  (to  ba  detailed): 


fie 


jzsfim: 


SCHEDULE  D— BALANCE  SHEETS. 

AtUch  hereto  balance  Bbcets  as  at  the  beg^ning  and  end  of  the  accounting  period  (preferably  in  parallel  columns),  ehowLng  as  nearly  aa  practicable  the  details  called  for  bcio' 
(These  balance  ehcete  should  be  prepared  from  the  boolca  and  should  be  in  agroement  therewith,  or  any  differences  ehould  be  reconciled.) 


Casb  (Inctading  cash  la  banJc  and  on  I 

iccounta  and  ootes  recclnblA  (to  be  ctassUli 


).  bonds  and  obligations  (aadi  Issae  to  be  stat«d  sepantclyi 


Tools  and  mlfior  rqulpmeoL 

Other  lstat«  charactar). 

I<ess  reserves  for  deerec 
applicable  to  each  Us 

Patents,  food  wUl.  and  elhi 

Created  by  stool 
Dlscotmt: 


n  and  depletion  (show  soparatflyai 


UABILTZIBS. 

jthen  (induding  bank  loaos). 

I  etpeoses  and  resnrea,  the  cbarges  creating  i 


CapUal  stock  ootstandlnf  ( 


e  claslfled)  or  all  partocrs'  capital  d 


*  Reserres  lor  deprocUtlon  maj  be  deducted  ti 


QUESTIONS. 


-Afttcuitufe  and 


KIND   OF   BUSINESS. 

ettcrs  clvcD  beltnr,  Identify  the  corporaUon's  main  Income  produd 
follow  this  by  a  special  description  ol  the  business,  suflicteDt  to  give 

eA  lodostries,  Including  flshinc,  logeinc.  loe  harrestioi!,  etc  ,  and 
J  product  or  products.    B— MLoing  and  quarr^ln^.  Including  ga 

implied  by 


equipping  and  insuuing  s&mi 

,_ ..      electric  light  or  power  (hydro  or  steam 

phooe.  waterworks  or  power.     Ea—Storafe— without  trvdln^:  o 
yards,  etc.)    Stale    prodoct  stored.    E4— Leasing   transpoi 
Trading  in  eoods  bou^t  and  not  produced  by  the  trading  o 


ircbjlorotberrf 


example,  coooeras 


•s.  G— ServlCB— 
faUlnc  is  abot« 


a  F  may  transport  o 


Srtand  market  their  own  product  exchislvely  or  malnlv,  i 
C  (monulacturtof)  which  own  or  control  tbelrsouroe  of  material 
e\i.  or  Install  their  own  product  exduslrely  or  malnlj,  abculd  be 
may  control  or  own  source  of  supply  of  materials  used  exdusli^y 

their  own  tTUH-ffhfttviiM,  bat  m  [^odtKUon  would  Ideotliy  Ihem 

F _ _._ 

pedficsUy  I 


D  Uquldatloo. 


class  (use  key  letter  dealgnalloD). 

.R.fttail.. business 

..ProdU(?.t3:...hay.,.„grain,^ 


OTHER   CORPORATIONS  IN   SAME  BUSINESS. 

ddrwics  of  Ave  rvpreseauUve  corpontiODS  I 


)( the  country  ensagad  in  U 


..  Dale  ot  orcanlzauon  or  incori-oi 


Ike  o%'cr  or  conduct  part  of  the  business  of  another 

corparstiooT If  so,  sUta  name  and  addms  ol  predecessor  or  otbei  orcanluUoo.  aod,  la  the  latter 

case,  tbe  Onandal,  maAagertal.  and  coDtnctnal  relatlonshlpi  existing  between  yoaraclTU  and  the  other  orcsal- 


VALUATIONS  OF   CAPITAL  STOCK. 
0.  What  was  tbe  talr  value  ol  the  toul  capital  stock  ot  the  oorporatlonasdetenniDed  in  tbe  but « 

Uaoy,  ot  the  capital  stock  taxF^..^..^ ~ 

Dais  ot  that  assessment _ 

AFFIUATIONS  WITH  CORPORATIONS. 
to.  Does  the  corporation  own  directly  or  control  through  closely  allUlated  Interests  or  by  a  a 
Domlooes  over  70  percent  ol  the  oatstanding  voting  capital  slock  of  another  corporsUonT ....... 


rotlog  capital  s 
e  capital  I 


k  owned  by  another  corporation  or  by  two  or  mote  oorpora- 

ck  as  well  as  owr  TO  per  cent  of  the  voiine  ca;dlal  stock  ot 
or  controtkd  by  the  same  Individual  or  partnership  or  by 


I.  Ifthean»werloquesHonslO,H,andl2,oranyoflhem,U"yK;  "IhefoUowinginfonnatlonshouIdbt 
1  as  at  tbe  becinnloK  ol  the  Bccountlng  period.  Indicating  any  substantial  changes  durlog  such  period: 


(NftmooTco^onUoo.) 

.v»ME  o,  SR^taotm. 

(NuiMotcorponiioaO 

S1«™M4.     ,^i'S,°<J2^; 

slunsbeU. 

Percentage  of 

. 

1 

1 



1           

1 

aura  nutsUDdin   UtSSLnii,   ot 

Phar«9  ouuundinic  en4  of  vear 

d  slock  Indicating  (I 


tdJvl 


voting  privileges  may  oe sacrificed  or  acquired. 

(6)  Stat?  the  dividend  privileges  of  the  rcspectlre  classes  cf  stock:  i 
accounting  period ;  the  date  and  rale  of  last  dividend  payment:  and  whi 
preterred  stock  participates  In  the  earnings  above  tbe  fixed  dividend  rale. 

(e)  State  If  the  preftrred  stock  has  preference  in  respect  to  distribution  of  assets,  dividends  or  otherwise. 

(d)  Show  seperaiely  the  number  ofshares  or  each  class  held  by  the  respectlye  stockholders  of  each  company 

{t)  Indicate  whether  any  of  thoslock  was  held  dunnglhe  acroun  ting  period  conditionally  or  by 
expressed  or  ImpUed,  and  state  whether  such  arraogtmeuis  are  considered  valid,  giving  supporting  n 
(()  Indicate  whether  any  stock  Ishcld  bv  emplovefs  orofHcers  and  sUte  their  relntioiidiip 

ocqulsiUon:  <1)  Par  value  of  stock,  (2)  book  value  of  stock;  (3)  market  value  of  stock,  (4)  consideration  or 
amount  paid  lor  such  stock;  (i)  method  of  payment  for  such  slock. 

sUte  the  relations  exlstlnc  between  the  various  stockhcaders  and  whether  such  slock  was  acquired  by  gift,  pur- 
corpcntlons  a  disproponionate  tnare  ol 


(ft>  ExDlainfuIlytbea 
Foreign  corporations  m 


GOVERNMENT  CONTRACTS. 

Hove  an  y^  adjustments  during  the  accounting  period  been  mode  on  account  of  ?'"*"j'^'^[j5l^JJ 
--sotlromanyGovcmmcntrontraciorconiracUlnw         you        v 

board  or  olhenrtser    (Answer  "Vcs"  or  "No")_i.'.r; 

;  whether  or  not  such  amounta  are  Irclnilwl  in  thb 

Qded  retom  accounlins  for  the  additional  Locofflo  Hied 

nUng  period  In  which  the  contract  was  tenmnatedT Submit  a  schedule  ihowing  fuD 

rs  cliht  wintract,  date  entcrvd  into,  date  the  work  ceased  under  said  contract  or  conirocts,  aud  Uio 

AMORTIZATION. 

bcendalffiodT    (.Vnsrccr  "yes"  or  "No") If  so,  for  what  year_ 


(5ic«  paragraph  at  top  ol  page 


LIST  OF  ATTACHED  SCHEDULES. 

schedules  accompsLnylDg  this  return,  gl^'tiie  '<"  ^ach  o  b 


le  and  a  srtirdute  number. 


Illustration  No.  165,  Page  2  of  Partnership  Income  Tax  Return. 


APPENDIX  C 


373 


Page  1  of  InstructioDS. 


GENERAL  INSTRUCTIONS. 
Partnership  and  Personal  Service  Corporation  Return  of  Income. 


1.  Partnerships. — Every  partnership,  whether  domostic  or  foreign, 
doing  business  in  the  United  States  must  make  a  return  of  income  on 
this  form  regardless  of  the  amoant  of  its  gross  or  net  income.  (See  Sec- 
tions 218  and  224  of  Revenue  Act  of  1921.) 

2.  Personal  service  corporations. — Every  personal  service  corporation 
must  make  a  return  of  income  on  this  form  regardless  of  the  amount  of  its 
gross  or  net  income.     (See  Section  21S  of  Revenue  Act  of  192l.) 

3.  Personal  service  corporation  defined. — The  term  "personal  service 
corporation"  means  a  corporation,  not  expressly  excluded,  the  income  of 
which  is  derived  from  a,  profession  or  business  (a)  which  consists  prin- 
cipally of  rendering  personal  service,  (6)  the  earnings  of  which  are  to  be 
ascribed  prLniarUy  to  the  activities  of  the  principal  owners  or  stock- 
holders, and  (c)  m  which  the  employment  of  capital  is  not  necessary  or 
isonlyincideutaJ.     (See  Section  200,  paragraph  5,  Revenue  Act  of  1921.) 

4.  Corporations  excluded. — The  following  classes  of  corporations  are 
expressly  excluded  from  classification  as  personal  service  corporations: 
(a)  Foreign  corporations:  {b)  corporations  50  per  cent  or  more  of  whose 
gross  income  consists  of  gains,  profits,  or  income  derived  from  trading  as  a 
principal;  and  (c)  corporations  50  per  cent  or  more  of  whose  gross  income 
consists  of  gains,  profits,  commissions,  or  other  income  derived  from  a 
Government  contract  or  contracts  made  between  April  6,  1917,  and 
November  11,  1918.  inclusive. 

A  corporation  is  not  a  personal  service  corporation  merely  because 
less  than  50  per  cent  of  its  gross  income  was  derived  from  trading  as  a 
principal  or  from  Government  contracts.  A  coi-poration  can  not  be 
considered  a  personal  sen'ice  corporation  when  another  corporation  owns 
or  controls  substantially  all  of  its  stock,  or  when  substantially  all  of  its 
stock  and  of  the  stock  of  another  corporation,  (not  itself  a  personal 
service  corporation)  forming  part  of  the  same  business  enterprise  is 
owned  or  controlled  by  the  same  interests.  (See  Sections  200  and  240 
of  the  Revenue  Act  of  1921.) 

5.  More  than  one  business. — A  corporation  engaged  in  two  or  more 
professions  or  businesses  which  are  more  or  less  related,  one  of  which 
does  not  consist  of  rendering  personal  service,  is  not  a  personal  service 
corporation  unless  the  nonporsonal  service  element  is  negligible  or  merely 
incidental  and  no  appreciable  part  of  its  earnings  are  to  be  ascribed  to 
such  sources.     (See  also  Section  303  of  the  Revenue  Act  of  1021.) 

6.  Activities  of  stoclholders. — In  determining  whether  a  corporation 
is  a  personal  service  corporation,  no  weight  can  be  given  tothe  fact  that 
it  renders  person&l  services  imless  (a)  the  principal  owners  or  stock- 
holders are  regularly  engaged  in  the  active  conduct  of  its  affairs,  and  are 
engaged  in  such  a  manner  that  the  earnings  are  to  be  ascribed  primarily 
to  their  activities,  and  (b)  its  affairs  are  conducted  principally  by  such 
owners  or  stockholders.  If  employees  contribute  substantially  to  the 
services  rendered  by  a  corporation,  it  is  not  a  personal  service  corporation 
unless  in  every  case  in  which  services  are  so  rendered  the  value  of  and  the 
compensation  charged  for  such  services  are  to  be  attributed  primarily  to 
the  experience  or  skill  of  the  principal  owners  or  stockholders. 

7.  Stocl:  interest  of  active  members. — No  corporation  or  its  owners 
or  stockholders  shall  make  a  return  in  the  first  instance  on  the  basis  of  its 
being  a  personal  service  corporation  unless  at  least  80  per  cent  of  its  stock 
is  held  by  those  regularly  engaged  in  the  active  conduct  of  its  affairs. 

8.  Capital. — In  de,termining  whether  a  corporation  is  a  personal 
service  corporation,  no  weight  can  be  given  to  the  fact  that  the  invested 
capital  of  the  corporation  under  Title  III  of  the  Act  or  the  actual  invest- 
ment of  the  principal  owners  or  stoclcholders  is  comparatively  small. 
If  the  use  of  capital  is  necessary  or  more  than  incidental,  capital  is  a 
material  income- producing  factor  and  the  corporation  is  not  a  personal 
service  corporation. 

INSTRUCTIONS   FOR   FILLING    IN  SCHEDULE  B,    PAGE   1. 

9.  This  Schedule  is  to  be  used  for  showmg  the  share  of  each  partner  or 
stockholder  in  the  income  of  the  partnership  or  personal  service  corporation, 
whether  distributed  or  not.  Where  the  ownership  of  a  personal  service 
corporation  has  changed  during  th^  accounting  period,  the  distributed 
portion  of  the  net  income  is  taxable  to  the  recipients,  while  the  undis- 
tributed portion  is  taxable  to  the  owners  as  at  the  end  of  the  accounting 
period. 

10.  Enter  on  lines  (a),  (6),  (c),  etc.,  the  proportionate  amount  of  the 
totals  shown  in  colxmins  3  and  4  to  which  each  individual  partner  or 
stockholder  is  entitled,  whether  distributed  or  not.  If  the  amount  to  be 
entered  in  column  4  is  a  loss,  the  amount  should  be  indicated  by  red  ink 
or  a  minus  sign. 

11.  If  the  partnership  or  personal  service  corporation  received 
directly  or  through  another  partnership,  personal  service  corporation,  or  a 
fiduciary,  interest  on  corporation  bonds  containing  a  clause  by  which 
the  debtor  corporation  agrees  to  pay  the  interest  without  any  deduction 


for  taxes,  and  there  were  filed  with  such  interest  coupons  a  white  certificate, 
Form  1000,  not  claiming  exemption,  a  tax  of  2  per  cent  was  paid  at  the 
source,  and  this  ta.x  should  bo  allocated  to  the  members  or  stockholders  in 
column  5. 

12.  If  any  amount  is  entered  in  column  6,  a  copy  of  Form  1116, 
completely  filled  in  and  sworn  to  or  afiHrmed,  must  be  submitted  with 
this  return.  If  euch  taxes  have  boon  paid,  Form  lllti  must  have 
attached  to  it  the  receipt  or  other  evidence  of  each  such  tax  payment. 
If  such  taxe^  have  been  accrued,  Form  1116  must  have  attached  to  it 
a  copy  of  the  return  on  which  each  such  accrued  tax  was  based,  or  other 
evidence  as  to  the  accrual  of  taxes. 

13.  When  a  credit  is  claimed  on  Form  1040  or  Form  1040.\  for 
accrued  taxes,  the  Commissioner  may,  as  a  condition  precedent  to  the 
allowance  of  such  credit,  require  the  taxpayer  to  give  a  bond  (Form 
1117),  with  sureties  satisfactory  to  and  to  be  approved  by  him,  in  such 
penal  sum  as  he  may  require,  conditioned  for  the  payment  by  the  tax- 
payer of  any  amount  of  taxes  found  due  if  the  taxes  when  paid  differ 
from  the  amoxmt  claimed  in  respect  thereof. 

INTEREST  ON    LIBERTY   BONDS.   ETC. 

14.  In  cose  the  partnership  or  personal  service  corporation  owned 
Liberty  Bonds  or  other  obligations  of  the  United  States  issued  since 
September  1,  1917  (except  Victory  Liberty  Loan  3j%  Notes,  and  postal 
saving  certificates  of  deposit),  or  a  share  of  these  obligations  hold  by 
another  partnership,  personal  service  corporation,  or  a  fiduciary,  the 
partnership  or  personal  service  corporation  ehoiJd  odvLsc  each  partner 
or  stockholder  as  to  his  proportionate  amount  of  these  obligations  and  the 
interest  thereon,  in  order  that  the  partner  or  stockholder  may  determine 
whether  the  interest  is  taxable  on  his  individual  income-tax  return. 

PERIOD  COVERED. 

15.  The  accounting  period  is  the  calendar  year  ending  December  31, 
1921,  or  the  fiscal  year  ending  on  the  last  day  of  any  month  other  than 
December  in  the  calendar  year  1921.  The  accounting  period  established 
for  the  year  immediately  preceding  must  be  adhered  to,  imless  permis- 
sion was  received  from  the  Commissioner  to  make  a  change. 

16.  If  a  partnership  or  corporation  changes  its  accounting  period, 
it  shall  as  soon  as  possible  give  to  the  collector  for  transmission  to  the 
Commissioner  written  notice  of  such  change  and  of  its  reasons  therefor. 
Upon  approval  by  the  Commissioner,  the  taxpayer  shall  thereafter  make 
his  returns  upon  the  basis  of  the  new  accounting  period.  (See  Sections 
212  (c)  and  226,  Revenue  Act  of  1921.) 

TIME  AND  PLACE  FOR  FILING. 

17.  Returns  must  be  sent  to  the  Collector  of  Internal  Revenue  for  the 
district  in  which  the  partnership's  or  corporation's  principal  place  of 
business  is  located,  so  as  to  reach  the  Collector's  office  on  or  before  the 
15th  day  of  the  third  month  following  the  close  of  tHe  accounting  period. 

SIGNATURES  AND  VERIFICATION. 

18.  Returns  of  partnerships  must  bo  sworn  to  by  a  member  of  the 
partnership.  Corporation  returns  must  be  sworn  to  by  the  president,  vice 
president,  or  other  principal  officer  and  by  the  treasurer  or  assistant 
treasurer  of  the  corporation.  If  receivers,  trustees  in  bankruptcy,  or 
assignees  are  operating  the  property  or  business  of  the  partnership  or 
corporation,  such  receivers,  trustees,  or  assignees  shall  execute  the  return 
under  oath. 

PENALTY  FOR  FAILURE  TO   FILE  RETURN  ON  TIME. 

19.  A  penalty  of  not  more  than  $1,000  attaches  for  failure  to  file  a 
tetum  within  the  time  required  by  law.  If  the  failure  is  willful  or  an 
attempt  is  made  to  defeat  or  evade  the  tax,  the  penalty  is  an  amount 
not  in  excess  of  $10,000  or  imprisonment  for  not  more  than  one  year,  or 
both,  together  with  costs  of  prosecution. 

INFORMATION  AT  THE  SOURCE. 

20.  Every  corporation  making  pajTncnts  of  salaries,  wages,  interest, 
rent,  commissions,  or  other  fixed  or  determinable  income  of  $1,000  or 
more  during  the  calendar  year,  to  any  indi\'idual  or  partnership,  is  re- 
quired to  make  a  true  and  accurate  return  to  the  Commissioner  of  Internal 
Revenue,  showing  the  nature  and  source  of  such  payments  and  tlie  name 
and  address  of  the  recipient.  Forms  1096  and  1099.  for  reporting  such 
information,  will  be  furnished  by  any  collector  of  internal  revenue.  Such 
returns  of  information  covering  the  calendar  year  1921  must  be  forwarded 
to  the  Commissioner  of  Internal  Revenue,  Sorting  Section,  Wabhingtou, 
D.  C,  in  time  to  bo  received  not  later  than  March  15,  1922. 


Illustration  No.  i66,  Page  i  of  Instructions  for  Partnership  Return. 


374 


APPENDIX  C 


Page  2  o(  Instructions. 


SCHEDULES  TO  BE  FURNISHED  IN  SUPPORT  OF  ITEMS  IN  SCHEDULE  A. 


The  schedules  called  for  below  should  be  prepared  and  firmly  attached  to  the  return.  Designate  each  schedule  with  the  number  of  the  item  in 
Schedule  A  which  it  explains.  Make  achedules  on  paper  of  uniform  size,  so  far  as  practicable,  and  enter  the  name  and  address  on  each  sheet.  Attach 
a  Ijst  of  schedules  accompanying  the  return,  giving  for  each  a  brief  title  and  schedule  number. 


SCHEDULE    A2:    COST    OF    GOODS    SOLD,     EXCLUSIVE    OF    EXPENSES, 
REPAIRS,  AND  OTHER    ITEMS  CALLED   FOR  SEPARATELY. 

H  you  are  engaged  in  a  trade  or  buHinesa  in  which  the  production,  purchase,  or  aale 
of  meichandifle  ia  an  income- producing  factor,  (a)  secure  from  the  Collector  of  Internal 
Revenue  and  &leaa  a  part  of  this  return  Certificate  of  Inrentory,  Form  1126,  and  (6)  submit 
a  schedule  ehowing — 

(1)  Cost  of  merchandiae  bought  for  aale. 

(2)  Cost  of  manufacturing  or  otherwise  producing  goods,     (Liet  principal  items  of 

cost,  grouping  minor  items  in  one  amount.) 

(3)  Plus  inventory  at  beginning  of  year. 

(4)  Total  of  Items  I  to  3.  inclusive. 

(5)  Less  inventory  at  end  of  year. 

(C)  Cost  of  goods  sold,  Item  4  minus  Item  5. 


Submit  a  schedule  showing  the  nature  and  amount  of  the  principal  items  included 
herein,  the  minor  items  being  grouped  in  one  amount. 

SCHEDULE  A8:  DIVIDENDS  SUBJECT  TO  SURTAX  ONLY. 

Submit  a  schedule  showing  the  amount  received  as  dividends  (a)  from  each  domestic 
corporation  other  than  a  corporation  entitled  to  the  benefits  of  Section  262  of  the  Revenue 
Act  of  1921,  or  (6t  from  each  foreign  corporation  when  it  is  shown  to  tiie  satisfaction  of  the 
Commissioner  that  more  than  50  per  centum  of  the  gross  income  of  such  foreign  corporation 
for  the  three-year  period  ending  with  the  close  of  its  taxable  year  preceding  the  declaration 
of  euch  dividends  (or  for  such  part  of  such  period  aa  the  corporation  has  been  in  existence! 
was  derived  from  sources  within  the  United  States  aa  determined  under  the  provisions  of 
Section  217  of  the  Act. 

SCHEDULE    A9:    DIVIDENDS  SUBJECT  TO  BOTH  NORMAL  AND  SURTAX. 

Submit  a  schedule  showing  dividends  subject  to  both  normal  and  surtax,  whether 
received  from  foreign  or  domestic  corporations,  and  which  are  not  allowed  as  a  credit 
under  Section  216  of  the  Revenue  Act  of  1921. 


unt  with  respect  to 
interest  on  Liberty 


SCHEDULE  AlO:  OTHER  INCOME  (not  including  any  am 
sales  of  capital  aaseta  or  miscellaneous  investments  no 
Bonds). 

Submit  a  schedule  showing  the  source,  nature,  and  amount  of  the  principal  itenu 
included  herein,  the  minor  items  being  grouped  in  one  amount. 

SCHEDULE  A12:  ORDINARY  AND  NECESSARY  EXPENSES  (except  amounU 
called  for  oeparately  in  Schedule  A). 

Submit  a  schedule  ebowiog  character  and  amount  of  the  principal  items  includeJ 
herein,  the  minor  items  being  grouped  in  one  amount. 

SCHEDULE  A13:  COMPENSATION  OF  PARTNERS  OR  SHAREHOLDERS. 

Submit  a  schedule  showing  for  each  member  of  the  partnership  or  stockholder  of  the 
corporation  who  was  performing  active  service  or  who  received  compensation  in  any  form 
from  the  partnership  or  corporation,  (a)  name.  (6)  duties,  (c)  time  devoted  ti'  such  duties, 
and  id)  total  compensation  for  the  accounting  period.  A  personal  service  corporation 
should  also  explain  fully  the  manner  and  degree  in  which  the  earnings  of  the  corporation 
are  dependent  on  the  acliWties  of  the  stockholders. 

SCHEDULE     A14:     REPAIRS  (including  tabor,  supplies,  overhead,  and  other 
items  properly  chargeable  to  repairs). 

Submit  a  echcdule  shiiwing  the  nature  and  amount  of  the  principal  items  included 
herein,  the  minor  itema  being  grouped  in  one  amount. 

Incidental  repair?,  which  do  not  add  to  the  value  or  appreciably  prolong  the  life  of 
property,  are  deductible  as  expenses.  Expenditures  for  new  buildings  or  for  permaDeot 
improvements  or  betterments  which  increase  the  value  of  the  property  are  chargeable 
to  capital  account.  Expenditures  for  restoring  or  replacing  property  are  not  deductible 
under  this  or  any  other  item  of  the  return.  Such  expenditures  are  chargeable  to  capital 
account  or  to  depreciation  reserves,  depending  on  the  treatment  of  depreciation  on  the 
books  of  the  taxpayer. 

SCHEDULE    A15:   INTEREST. 

Submit  a  detailed  schedule  with  respect  to  interest  paid  or  credited  to  any  member. 
State  the  character  and  origin  of  the  principal  on  which  the  interest  was  computed,  and 
whether  such  principal  is  evidenced  by  notes  or  other  forms  of  contract.     Describe  fully. 

Theamountof  interest  deductible  under  Item  15,  Schedule  A,  is  the  amount  of  interest 
paid  or  accrued  within  the  taxable  year  on  indebtodneea,  except  on  indebtedness  incurred 
or  continued  to  purchase  or  carry  obligations  or  securities  (other  than  obligations  of  the 
United  States  issued  after  September  24,  1917,  and  originally  subscribed  for  by  the  tax- 
payer) the  inlercet  upon  which  is  wholly  exempt  from  taxation. 


SCHEDULE  AI6:  TAXES. 

Submit  a  schedule  showing 
(a)  income,  war  profits  and  excei 
States,  (b)  90  much  of  the  incom( 
authority  of  any  foreign  country 
credit  under  Section  222,  neveni. 
a  kind  tending 
the  taxpayer  upon  his 


nposed  by  the 


by  the  corporation  unlhout  i 


xcs  paid  or  accrued  within  the  taxable  year  except 

profits  taxes  imposed  by  the  authority  of  the  United 

war  profits  and  excess  profits  taxi 

r  possession  of  the  United  States, 
Revenue  Act  of  1921,  (c)  taxes  assessed  agai 
the  value  of  the  property  assessed,  and  (<f)  1 
erost  as  shareholder  or  member  of  a  corporati 


nbun 


■nent  from  the  taxpayc 


local  benefits  of 
?8  imposed  upon 
which  are  paid 


SCHEDULE  A17i    BAD  DEBTS. 

Submit  a  schedule  showing  debts,  or  portions  thereof,  arising  from  sales  or  professional 
services  that  have  been  reported  as  income,  which  have  been  definitely  ascertained  to 
be  worthless  and  charged  oft  within  the  accounting  period,  or  auch  reasonable  amount 
as  has  been  added  to  a  reserve  for  bad  debts  within  the  year. 

If  the  amount  entered  as  Item  17,  Schedule  A,  ia  an  addition  to  a  reserve,  fumiih 
proof  of  the  reasonableness  of  the  amount.  (See  Section  234  (a)  5  of  the  Revenue  Act 
of  1921.) 

SCHEDULE  A18:  EXHAUSTION,  WEAR  AND  TEAR  (including  obsolescence). 

Submit  a  schedule  in  colujrnar  form  showing  for  each  t;laa8  of  property  the  following 
'information: 

(1)  Kind  of  property  (if  buildings,  state  material  of  which  constructed). 

(2)  Date  acquired. 

(3)  Age  when  acquired. 

(4)  Cost,  or  if  acquired  prior  to  March  t,  1913,  the  fair  market  value  on  that  date. 

(5)  Probable  life  after  acquirement. 

(6)  Amount  of  depreciation  charged  oft  this  year. 

(7)  Total  amount  of  depreciation  charged  off  previous  to  thJB  year. 

The  total  amount  claimed  in  this  schedule  should  correspond  with  the  figures  reflected 
in  the  balance  sheet. 

If  obsolescence  is  a  factor  Li  determining  your  deduction,  attach  a  statement  showing 
the  amount  claimed  for  the  accounting  period  and  the  basis  on  which  computed. 

The  amount  deductible  on  account  of  d.^preciation  ia  an  amount  charged  off  which 
fairly  measures  the  loss  during  the  accounting  period  in  the  value  of  physical  property  by 
reason  of  exhaustion,  wear,  tear,  and  obsolescence.  Such  an  amount  should  be  determined 
on  the  basis  of  the  cost  of  the  property,  or  if  acquired  prior  to  XIarch  1 .  1913,  the  fair  market 
value  on  that  date  and  the  probable  number  of  years  constituting  ita  life.  The  capital 
sum  to  be  replaced  should  be  charged  off  over  the  probable  life  of  the  property  either  in 
equal  annual  installments  or  in  accordance  with  any  other  recognized  trade  practice,  such 
asanapportionmtntof  the  capital  sum  over  units  of  production.  Whatever  plan  or  method 
of  apportionment  is  adopted  must  be  reasonable  and  should  be  described  in  the  return. 
Stocks,  bonds,  and  like  securities  are  not  subject  to  exhaustion,  wear  and  tear  within  the 
meaning  of  the  law. 

SCHEDULE  A19:   DEPLETION. 

If  a  deduction  is  claimed  on  account  of  depletion,  secure  from  the  Collector  Fortn  X) 
(minerals),  Form  E  (coal),  Form  F  (miscellaneous  nonmetals).  Form  0  (oil  and  gaa),  or 
Form  T  (timber),  fill  in  and  file  with  return.  If  complete  valuation  data  has  been  filed 
with  questionnaire  in  previous  yeaiB,  then  file  with  this  return  information  necessary  to 
bring  your  depletion  schedule  up  to  date,  setting  forth  in  full  statement. of  all  transactions 
bearing  on  deductions  or  additions  to  value  of  physical  asaet^  n'ith  explanation  of  how 
depletion  deduction  for  the  accounting  period  has  been  determined.  In  case  of  timber 
this  should  be  done  by  filling  in  Form  T  (timber). 

SCHEDULE  A20:  AMORTIZATION  OF  WAR  FACILITIES. 

In  case  a  deduction  is  claimed  on  account  of  amortization,  a  schedule  should  be  sub- 
mitted containing  the  information  called  for  in  Guide  Form  1007M,  which  explains  in 
detail  the  manner  in  which  a  claim  of  this  nature  should  be  presented.  A  copy  of  this 
form  may  be  obtained  from  the  Commisaioner.  (See  Section  214  [a)  9  of  the  Revenue  Act 
of  1921.) 


Submit  a  schedule  in  columnar  form  showing  the  following  information  for  each  a3aet 
sold: 

(1)  Kind  of  property. 
{2}  Date  acquired. 

(3)  Sale  price. 

(4)  Cost. 

(5)  Fair  market  value  o 

(6)  Cost  of  subsequent 

(7)  Depreciation. 

(8)  Net  profit  (or  loss). 

(9)  Amount  in  column  5  which  represents  good  will,  if  any. 

If  any  of  the  assets  were  acquired  prior  to  March  1,  1913,  state  how  the  (air  marbi 
\'alue  on  that  date  was  determined. 

In  case  of  exchange  of  property,  submit  evidence  substantiating  the  basij  u^ed  i 
arri\'ing  at  the  (air  market  value  of  the  property  received, 


1  March  1,  1913,  if  acquired  prior  to  that  date, 
mprovementa. 


SCHEDULE  A24:  LOSSES  SUSTAINED  BY  FIRE.  STORM,  ETC. 

A  schedule  similar  to  the  one  requested  above  should  be  submitted  with  respect  to 
losses  of  property  arising  from  fires,  storms,  shipwreck,  or  other  casualty,  or  from  theft, 
and  not  compensated  for  by  insurance  or  olherwiae,  except  that  column  3  should  show 
" Insurance  and  salvage "  instead  of  "Sale  price." 

CAPITAL  EMPLOYED   IN   BUSINESS. 

If  the  balance  sheet  (Schedule  D)  of  a  personal  service  corporation  indicates  that  a 
substantial  amount  of  capital  (invested  or  borrowed)  is  employed  in  the  business,  submit  a 
statement  explaining  why  the  employment  of  sucji  capital  is  incidental  and  not  necessary. 

WORKING  PAPERS. 

Every  partnership  or  corporation  should  pressrve,  available  for  inspection  by  a  revenue 
officer,  working  papers  showing — 

1.  The  balance  in  each  account  on  the  partnership's  or  corporation's  books  that 

was  used  in  preparing  Schedule  A. 

2.  The  amount  deducted  from  each  such  balance  on  account  of  each  class  of  non- 

taxable income,  unallowable  deductions,  and  other  adjustments  indicated 
in  Schedule  C,  vath  a  reference  to  the  number  of  the  item  in  Schedule  C  in 
which  each  amount  so  deducted  was  included. 

3.  The  remainder  of  each  such  balance,  analyzed  to  ehow  the  amount  included 

in  each  item  of  Schedule  A,  ■with  a  reference  to  the  number  of  the  item  in 
Schedule  A.  s— 11743 


Illustration  No.  167,  Page  2  of  Instructions  for  Partnership  Return. 


APPENDIX  C 


375 


Form  1120 

U.  S.  INTEENJU,  ReTEOTE 

CORPORATION  INCOME  AND  PROFITS  TAX  RETURN 

FOR  CALENDAR  YEAR  192 
Or  for  period  begun ,  192  ,  and  ended _ ,  192 

PRIKT  PLAINLY  CORPORATION'S  NAME  AND  BUSINESS  ADDRESS 

J.  A.  T7hltney  &  Co., 

Page  1  of  Return 

(DO  NOI  WHITE  IN  THESE  SPACES) 

THIS  RETURN  SHOULD 
BE  FILED  NOT  LATER 
THAN  THE  15TH  DAY 
OF  THE  THIRD  MONTH 

Eiaaiadbr 

(Cuhln-.Sump) 

FOLLOWING  THE  CLOSE 

OF  THE  TAXABLE 

PERIOD 

815  Main  Street, 

<Slract  KDJ  DumUr.) 

Cinoirmati,   Ohio. 

(I'MtofflMondiltau.) 

CASH    CHECI    M.O.    CERT.  OPINIO 

KIND  OF  BUSINESS- 


Wholesale  Srooery 


IS  THIS  A  CONSOLIDATED  RETURN  7      NO 


SCHEDULE  A— TAXABLE  NET  INCOME. 


CROSS  INCOME.                                       1 

108 1 393 

73 

»___.. 

34 
^1.. 

335 
.44.1. 

32 
.96. 

■73" 

36 

2.  Leaa  cost  of  rooJh  sold,  exclasivo  of  itema  called  for  Boparately  b«1ow  (from  Schedule  .\2).  1 , 

741056 

41 

1 

3.  Groea  income  from  operationa  other  than  trading  or  manufacturing,  leea  allowances  (from  Schedule  A3) 

105 

l.'SB 

94 

" "~ 



8.  Share  of  net  income  earned  by  personal  service  corporation  (whether  received  or  not) 



10.  Gross  income  from  all  other  sources  (not  including  any  amount  reported  in  Item  23,  bolow)  (fimn  Schedule  AW) 

■■". 

85 

00 

95 

DEDUCTIONS. 

12.  Expensee  (except  amounts  reported  in  Item  2  above,  or  called  for  separately  below)  (from  Schedule  A 

f         zs 

248 

000 

31 

00 

30 

092 

5 

1 

018 

fiO 

.2.Q7_ 

^ 

TOR 

?fi 

IS.  Exhaustion,  .^ear  and  tear  (including  obsolescence)  (from  Schedule  A18) „ 

10     Tl„i,1„i;„n  ((mm  .S<-),™1.,1«   »1Q) 

i 

£56 

22. 

■"I "" 

20.  Amortiration  of  war  facilitiee  (fmm  Schedule  A20) 1            ! 

21.            Total  OF  Items  12  TO  20 _ 

12 

2?.             Ttkvi  11  MlNii.'i  Item  21 ._    _.. 

«        1       6 

013^81. 

1 

1 

24.  Lessee  by  fire,  storm,  etc.    (From  Schedule  A2'l.)    (Extend  difference  between  or  sum  of  Items  23 

and  24) ..1 J 

1 

1 

... 

^ — "T"  " 

1  — 

1 

27.            Net  Inxomr  (Item  25  minus  Item  26)  tif  return  ia  for  a  period  less  than  twelve  months,  see  page  1  of  Instructions,  paneraph  10) .    . 

s. 

.6 

013  183 

SCHEDULE  B— INVESTED  CAPITAL. 


.  Capital,  euipliu,  and  undivided  pro&ta  at  be^iuDg  of  taxable  period  (from  Schedule  E,  Item  11).. 
.  riuB  adjuetmcnta  by  way  of  additiona  (from  Schedule  F,  Item  4) 


.  Less  adjufitmeDtd  by  way  of  deductioos  (from  Schedule  G,  Item  7)_ 


.  riu3  or  minuB  chaogee  in  invested  capital  during  taxable  period  (net  lacrease  or  Decrease  from  Schedule  Q) 

Total  (or  Remaisdes).„ „_ 

,  Lc33  deduction  on  account  of  inadmissible  aaseta  (from  Schedule  J) 


..3i|.5.2.e..L4l 

5   063 !4S 


02"..26.4.'S.a. 

,6 1  56.3  [17. 


y.  Invested  capital  for  taxable  period.. . 


' -I 

i....3.6-i..a4.6.'..15. 


SCHEDULE  C— EXCESS  PROFITS  CREDIT. 


1.  Eight  per  cent  of  invested  capital  for  taxable  period  (Item  9  of  Schedule  D) „ 

2.  Exemption  ($3,000)  (except  for  a  foreign  corporation  or  a  corporation  satisf>-ing  the  conditiona  provided  in  Section  262  of  the  Act) . 

3.  Excess  Profila  Credit  (Item  1  plus  Item  2) 


SCHEDULE  D— COMPUTATION  OF  TAXES. 


(ITEII  27,  ^CHXDULZ  ^ 


s  Proftts  Cactnr 


.  Daumce  SeBlZCT  TO  Tax. 


I.  AMOtrm  or  Tax. 


-.  20*   S- 
J40»  L 


.  Net  income,  not  in  excess  of  20^  of  invested  capital 

.  Totals  computed  under  Section  301(a) 


.6....Q.13..!.8.3_5 


.6.I..107.I.85L l.....l'.one 


I         I 


.  Exccsa  Profits  Tax,  if  computed  under  SectioDS  302,  303,  304{c>  or  337  of  the  Revenue  Act  of  1921  (i 
.  Net  income  (Item  27,  Schedule  A) 
oMIi^tloos  of 


UUtod  &tAtes(lU<m4 
Eicou  pro&U  tftx  (Itei 


homi 


nlc  corporation 


10.  Balance flt^m  5.  Ices Items8, 7, and 9,  or  Iteroa 6, 8. and 9)..|$-. 


.Gli 


.82.. 


9  2  of  InatTuctiona.  paragraph  14> 


11.  Tncomo  tax  (\0%  of  Item  10) 

12.  If  net  income  dooa  not  exceed  $:2^,200,  enter  amount 
in  exccoB  of  126.000 


13.  Totaltax(Item3or4lhcIcsBer,or8.plu5ltcmsllaodl2). 

14.  I-ms:  Incoma  und  T>roOLi  tuu  paid 

15.  T»x  pttKl  »  "  "*        '  '"  ' 

16.  Balanco  o 


e  Aci  ofini}.. 
c  (Item  13  m 


a  Itcma  14  and  15) 


401 1  38 


An  amended  i 


:  b«  plainly  marked  "Amended.* 


Chccka  and  drafts  will  be  accepted  only  if  payable  nt  par. 


Illustration  No.  i68,  Page  i  of  Corporation  Income  Tax  Return. 


376 


APPENDIX  C 


Page  2  of  Return. 


centered  In  thIssctieJula 


e  precedlDK  taxable  period. 


^fmputios  net  Incomo  asTv-lunied  In  prevlCTu  years  may.ir  properly ftxplained,  bo  enWed 

ElO.  If  th8con>oratloo  liad  on  hand  at  any  tlmo  diirlnR  the  toiablo  period  any  treasury  s( 
nial  entries coverinBthooriirioaliisuinee.  repossession  and  any  subseqwsnt  adjustroenlsstn: 
asory  s'oct  Includes  all  stock  reacquired  by  the  corporation  and  not  conceM,  regardless  of 
cqiilsliloB. 


Capital  stockpald  up  i 

1.  First  preferred.,,. 

2,  Seresd  prclened^ 


d  actually  outstaDdlac  at  tbe  close  o(  t  he  precedlnc  year 


■5.0.Q0P..--Q.Q-. 


Surplus  and  uodlrlded  profits: 
5.  Paid-in  surplus. , 

(to  be  reoDQclled 
S.  Otber  Iteisi  (to  be  detailed). 


-■'T'"' 


...acQQQ.on.,.. 


,.3.73Z8..AX.. 


..Z1ZZS..A1.. 


SCHEDULE  F.-ADJUSTMENTS  BY  WAY  OF  ADDITIONS, 

IdltloD  to  tnrejl«d  capital  h  claimed  In  Item  1.  Schedule  F.  submit  i 
roperty,  (^)  the  year  In  which  1 1  mas  paid  In.  (c)  from  whom  acquired. e» 
ration,  (d)  the  actualcash  Tohie  of  snch  property  at  the  date  when  paid  Ir 
sued  therefor  and  tbo  amount  at  which  such  property  was  entered  in  the  a 


it  ot  depreciation  sustained  o: 


3  Icrdepredatloc 

e  beslnrlne  of  the 
te  bet;lrrinf;  of  the  1 


ildepreclaiio 


at  the  beglnnln 
proposed  res  tot 


3.  Schedule  F,  stale  specifically  tb 
e  beciuulng  o(  f'b  (luible  period. 


I.», 

.„ou„,. 

'•■■'|f;?K;;*s's?sS^'i;roW,'?;&^^^^^^^ 

-  Mim    tt    !.     t  «(<«>6  cU™32«(.13oUheArt) 

.i.  IJoprMlalion  or  ilepletion  r^arrrd  In  the  awvunls  of  the  MMporallon  bol 

,.            T-T,, 

SCHEDULE  C— ADJUSTMENTS  E 


-  DEDUCTIONS. 


CI.  Is  any  patent.  copyrlEht,  t 
other  simlliir  Intangible  property,  i 
not  entered  speciTically  as  such,  Is  I 


ID?  ..-;?2cr...  in 

U  acquired  pnor  to  ) 
stocic  outsi ending  oi 


itangible  value  mereed  under  anj 


It  Issued  therelorT  ..?2slf-- 


le  par  value  ol 

r 

mpleto  explanation  of  the  basis  upon  » 
le  besitmlDg  of  the  tasoble  period,  (/)  thi 


Ifnll 

he  inlanplbles  were  acqwl 

ll^?tim1 

Intanciblenww. 
Bibles  excwds 

acquired 

Bee"e»K) 

oliotanc 

blessb 

yinote.ce 

lUst  be  included 
e  March  3, 19i:. 
>  Included  In  invested  caplUI  for  i 


KoTE.~If  the  stocic  ol  tbo  corporatloD  was  Issued  at  a  nominal  value  or  wl 

of  issue.    The  agiirecate  value  so  determfTiPd  of  stock  out-itandliie  on  Uarcb  3 
tiuabia  period,  Eball  bo  the  basis  lor  tho  computation. 


'boutstandlngattbebeglniiint: 

)r  the  purpose 
'ginning  ol  the 

i.„t  ...2z<r 


n  acquired,  (f )  par  val 


sttwoc;uestionsls' 
ksdotcnnlned,(/)T 
tern  2,  Schedule  G, 


it  by  IhecorporatK 

r  Section  326  (a)  2  of  the  Rovcm 


lo  period. 


mgcd  ownership  re 


C3.  Was  the  business  reincorporated,  rcorgwiiied,  or  consolidated  or  was  tl 
•  change  la  ownership  ol  property  after  March  3, 19I7f  — -^^^^ "*"• 

(o)  Did  on  Interest  of  SO  per  cent  or  more  Id  the  business  or  la  the  property     _. „__  .    __       ,    __ 

'in  the  control  ol  the  same  persons,  corporations,  associations,  or  portncrihlps.  or  of  any  ot  themT  ..i^?**:. 

(b)  Woreony  ol  the  assets  entered  on  tho  books  ol  tho  corporation  making  this  return  at  a  hlgher^ilue  than 
on  the  books©;  its  predecesscrT gtZ^. 

(c)  If  such  previous  ovucr  was  not  a  corporation,  attach  a  statement  showing  (O  the  cost  ol  acquisition  to 
the  previous  owner  ol  any  asset  so  trmsferred  or  received,  (-)eipeji<ijtures  subsequent  to  that  dateCor  bettcnncnl 
or  development  not  deducted  as  expense  or  otherwise  since  ilorcb  1 ,  1913.  by  such  previous  owner  ,(3)  the  allow. 
aneo  lor  depreciation,  depTellun,  or  1  rapolnncnt  since  the  date  of  acquliition  by  such  previous  owner. 

(if)  If  all,  or  substantially  all.  ot  the  properly  was  acquired  (rom  a  corporation  during  the  taxable  period, 
Bttach  hereto  balance  sheets  of  such  predecessor  corpora  tlonsar  at  thehegtnningoi  tho  taiaMe  period  end  asat  the 
Oatolminodiately  prior  to  tho  transfer  of  the  property  to  the  corporation  maJrin?  the  return,  and  al5.>  a  baliinct 
sheet  or  statement  of  the  corporation  making  tbJs  return  showing  the  values  at  which  such  properly  received 


[vested  capital  e: 


%,  Is  any  property  (includin;  physical  property,  securities,  and  laianpblc  property)  paid  for  with  cash 
'i  other  tonslble  property  entered  on  the  books  of  thr>  corporation  at  a  value  In  excess  ol  the  amount  of  cash 

berefor  or  the  actual  cash  value  ot  the  tanpiblc  property  paid  therefor? J^iZ^Of....    II  so,  suhmjt  a 

,rs  (u)  kind  of  property,  (6)  amount  of  cash  paid  therefor,  (e)  actual  cash  vaUio  of  other  tangible 
properly  paid  tbcrc'or,  (rf)  how  I 


d(/)cxccssol{0over(6)or(c) 
for  the  laiahlc  period. 

kind?  LJaJLA^,....,  CO  depredation?  ..U^. 
mineral  iK^osits.  llmNir  supplier, ar^d  the  lilfr?  . 


e  period  or  periods  la  which  I 


!.  VaUia 


Vatuallor 


property  paid  In  ton 

L  Apprerlatlnn - 

I.  Depreclitlon,  depletion,  I 


D  Boothrr  corporation.. 


(n)  Dysaleofcapit: 
(ft)  By  payment  of 


)  Dy  payment-olc; 


(n)  If  si 


Instructions  should  be  followed  in  maldn 
,Uon  or  deduction,  deduction  beinc  dfsifni 

Is  schedule.    Assets  (other  than  ca.^ )  paid  in  for  stock  must 

t6)  I(  capital  stock  ot  the  corporation  Is  reacquired  but  not 
stock  should  bo  deducted  tromlavested  capital. 

(()  Report  diridends  paid  out  otproRtsol  prior  years  but  i 
period.  Any  distribution  made  during  the  Brst  fiO  days  ol  the  ta 
from  earnings  or  profits  accumulated  during  preceding  ta.iob 

dates  when  due  and  payable  w 


Should  no  obangas  be  no 

ed.thereasoo 

bove  adjustments;  each  1 

em  should  be 

o  amount  of  discount)  she 

jM  bo  entered 

leonlyl 


ered  In  column  7  equsis  total  Income  and  prsi 
uinns  1  to  5  should  be  given  for  a 
rroacquisillon  ot  tho  corporaiions 


Ibo  proBts  tor  that  period  l< 
1  bo  prorated  and  dedufli 
[  multlpUedbyO. 


blo  period  (Including  tl 


e  date  of  change). 
ir  decreases  reflected 


,nth.b«l,nc.sh»tt. 

»'<">• 

luUjr^ODdMlhmrtlh. 

'•s;;'.'y^;r.- 

.L. 

3i 

"'.Lu?" 

BCtiM.ryrecrivwI 
or  poid  out. 

eirffivl 

7.  Adjusted  averaee. 

^  Ns.  dar.  >D  Uubl.  / 

'Ask: 
■lllJx.: 

^... 

Z'M'.. 

.IBDJlt 

Zk/.^i* 

..j.a.t.f,M 

i.jr.a.ac.-Cff. 
.~..^.r..c..£A 
.-.iJ-.a..'/./. 

M!/.i.x3. 

0 '.: ^  - 

'M.-. 

.ZL..}^. 

^ 

».              KET  IMC^BASS  OB  VtCXXASK 

t.2.Jr.'ir3..i.7. 

Xlas  the  corporation 


ilallorpartotthelnie 
the  capital  invested  Ir 


SCHEDULE  J.-INADIVIISSIBLE  ASSETS. 

r  obligations,  except  obligation) 

i  in  part  of  gain  or  proQt  from  the  sale  or  other  disposition  thereof,  or 


le)7  ,..2Z^.. 


[ved  Ir 


Is  deemed  a 


nedcjlved  from  such  assets  and  the  computation  of  tho  part  ot  the  capital 
e  Inadmissible  assets  shall  bo  valued  at  cost  of  acquisition,  except  that  II 


icid  a: 


D  Regulations 


1  during  any  year  may 
0  beginning  of  the  tax- 

Kloiljuii'i  with  respect  to  tho 
nespondingly  adjusted.    Cut 

icr  authority  of  the  Revenue 


held  at  beginning  ol 

sld  at  beginning  of  t! 


Illustration  No.  169,  Page  2  of  Corporation  Income  Tax  Return. 


APPENDIX  C 


377 


Pasro  3  of  Return. 


QUESTIONS. 


KIND  OF  BUSINESS. 


1.  By  mcftDB  of  the  key  lottora  given  bolow,  identify  the 
producing  ft^tinty  with  one  ol  th«  general 
of  the  busincflB  sulTicieot  to  pive  the  information  called  for  under  ench  ppneral  rlaas 

A. —  Aerit-ulluro  and  rebtrd  indufltrie«.  includint:  ri^hinR,  logjnnK.  ico  harvertinf*, 
and  (Ubo  the  leasing  of  such  Droporty.     State  the  product  or  prodi    "       -      .-   ■ 


>  product  * 


'kntfXw 


MioiDg  and 


luding  ga3  and  oO  wellB.  and  also  the  loaain^;  of  such  proj: 
■  proffucta.  C. — Miuiuffictiiring.  State  tho  product  and  also  the  material 
plied  by  the  name  of  tlie  product.  D. — Conotruction— oxcavfttiooB,  buildingn, 
bridf;c9,  railroads,  nbipe,  etc  ,  al«>  e<|uipping  And  inatalling  same  with  Bj'StemB.  deWcec. 
or  machinery,  without  thcL-  manuiacturo.  Stite  nature  of  etructurea  built,  matcriala 
used,  or  kind  of  inntallationfl.  El.— Transportation—rail,  water.  local,  etc.  State-  tho 
kind  and  epecial  product  transported,  if  any.  E2.— Public  utilities— gaa  (natural,  coal, 
or  water);  electric  lipht  or  power  (hydro  or  eteam  generated);  beating  (steam  or  hot  water); 
telephone;  watcnrorka  or  power.  E8.— tutorage — without  trading  or  profit  from  salea — 
(elevators,  warebousea.  Htocltjarda,  etc)  State  product  rtored.  E4.— leasing  transpor- 
tation or  utilitiea.  State  kind  of  property.  P. — Tracing  in  goods  bought  and  uot  pro- 
duced by  the  trading  concert).  Stato  manner  of  trade,  whether  wholeaaje,  retail,  or  com- 
miaaion.'and  product  handled.  SaJos  with  etorage  with  profit  primarily  from  aalea.  O. — 
■  -e— doniertir,    including  hotels,   reslauranta,  etc.:  amu"ement3;  other  profeasional. 


porsonal.   or    technical 
several  of  th< 


H. — Finance,   including  banking, 

nee.     I. — roncems  not  falling  in  above  clawca  (a)  because  of  combining 

ith  no  pr<vlominant  buflotas,  or  (b)  fr^r  other  reasons. 

whose  bumoeas  involves  activity  falling  in  two  or  more  of  the  above 

here  the  lamf  product  is  concerned,  should  report  buaineee  as  identified 

*     ■  *  •  example,  concerns  in  A  or  B  which  also 

avely  or  mainly,  should  still  bo  identified 

1  C  (manufacturing)  which  own  or  control  the' 

ly  in  A  or  n  and  which  also  transport,  aell,  or  install  their  own  prw 

■  mainly,  should  be  identified  witii  manufacturing;  coacema  in  T>  may 

control  or  own  eource  of  supply  of  materials  used  exclusively  or  nuunly  i 

i  work;  concerns  in  El  or  E2  may  own  or  control  the  source  of  their  material  or  power; 


icluaively  • 


product 

r  construc- 

F  may  transport  or  otore  their  own  merchandise,  but  its  production  would 
identify  them  with  A,  B,  or  C. 

3.  Answers:  p 

ia)  (General  clase  fuse  kev  letter  designation) „". -. 

(6)  Main  income-prod ucing  buaiuess  igive  epecifically  the  information  called  for 
under  each  Key  letter,  also  whether  acting  as  principal,  or  aa  a^cnt  c 


1  liquidation).. 


..y^Jl'tPj  e  s  al  e...bu3_in  e_S3^^ 
Product:  groceries . 


OTHER  CORPORATIONS  IN  SAME  BUSINESS. 

4.  Enter  on  the  following  lines  the  names  and  flddressea  of  five  representative  corpora- 
tions in  your  locality  or  section  of  the  couutr\'  engaged  in  tho  eame  kind  ol  business: 

■The  Colter  Company.  555  Reading  Roftd.  City. 

Foltz  Gro.  &  Baking. Co.,  7  E.  V/ater  St.,  City. 

^lati.„Whole.3ale..Gro.....Cb..,...9th 

American  Grocery  Co. .    580  W.    Sixth  St..    City. 

.Janszen. Grocery  Co..    Second  &  V?alnut.   City.  


INCORPORATION. 

6.  Date  of  incorporation Jan)iary_Jl. 

6.  Under  the  laws  of  what  State  or  countr,- .Qhi.Q. 


192. 


REORGANIZATION  AND  ACQUISITION  OF  MIXED  AGGREGATES  OF  ASSETS. 

T!F/  ofi',3  prrdeassoTs,  been  reorganized,  or  hae  it,  or  any 

v ?(iuire'i  a  mi:^ed  aggregate  of  tangible 

3  whole  or  in  part  with  stock  or  other 


.  statement 


7.  Has  the  corporation^ 
ofit$  ■predecrssort ,  taken  over  a  gning  bii 
and  intangible  property,  and  paid  lor  Buch  property 

aecurities  since  the  closo  of  the  preceding  taxable  period? j^^.Q 

8.  If  80,  furnish  a  brief  narrative  history  of  the  buaioesa  and  eubmit 
showing: 

(a}  The  name  of  the  concern  taken  over  (or  fmm  which  the  property  was  acquired); 
CoS  The  nature  of  the  assets  and  liabilities  eo  acniiircd ; 
(c)  TIio  total  par  value  of  the  stock  ieaucd  therefor, 

(if)  The  value  at  which  each  claae  of  asBets  waa  carried  on  the  booke  of  the  concern 
from  which  acquired  (submit  a  balance  sheet  of  the  predecessor  concern  as  at  the  dato  of 


thifl  return,  and  full  details  of  any  adjuatmenta  subsequently  made  pertaining  thereto  a    _ 
the  basis  on  which  such  revaluation  was  made. 

9.  If  patents,  copyrighta,  secret  proceeses  or  formula?,  pood  will,  trade-marks,  trade 
brands,  franchises,  or  other  intangible  property  we.-e  acquired,  ?tato  the  basis  on  which 
their  \-alijG  was  determined  and  how  they  were  paid  for. 

10.  1  f  at  the  time  of  any  purchase  or  reorganization  a 
property  wa 


e  entered  on  the  books  of  the  r 
a  value  in  exceee  of  that  at  whirh  it  waa  carried  c 
the  basis  on  which  the  revaluation  was  made. 


,  the  books  of  the  vendor  c 


II.  Does  the  corporati( 


by 

another 


tions  owned  or  controlled  by  the  e 
r  partnerships? ■._, 


r  partnerahip  or  by  the  s 


a  directly  or  control  through  closely  afRIioted  inlerestB  or 
'  70  per  cent  of  the  outstanding  voting  capital  stock  of 

Ito 


•orporation  or  of  other  corporationa? 

iz.  IS  over  70  per  cent  of  your  outstanding  voting  capital  stock  owned  by  another  cor- 
poration or  by  two  or  more  corporations  that  are  affiliated? Ai.9. , 

13.  Is  over  70  per  cent  of  your  outstanding  voUng  capital  stock  aa  well  aa  over  70  per 
cent  of  the  outetandint;  voting  capital  stock  of  another  corporation  or  of  other  < 


e  individuals 


14.  If  tho  answer  to  questions  II,  12,  and  l-t.  oi 
following: 

(a)  Did  tho  corporation  file  AflUintcdCorporatic 

If  the 


T^ 


to  any  of  them,  i«  "yes."  aninrer  the 

9  Quertionnairo,  Form  819.  for  1917  or 

.nswrr  to  IhLa  nuetitioD  i«  "yed."  a 
circuavtancoe  ae!<?ribcd  in  question 

and  tho  answer  t*>  questioOB  11,  12,  and 

procure  from  the  Tollpctor  of  Internal  Itovonuo  for  y 
district  Form  810.  which  shall  bo  filled  out  and  filed  a«  a  part  of  this  roluru.     II 
answer  to  thin  queBtion  iB  "no,"  quertion  (6)  need  not  bo  answered 
({>)  Did  ouDBtantialty  tho  aamo  conditions,  as  ■ 

1*)20  or  prior  yearp,  obtain  during  th< 

If  the  answer  to  this  quoetion  is  "no."  : 

the  situation  has  changed,  should  bo  attache*)  to  i 

have  been  subBtantial  changea  in  stockholdinp, 

should  bo  eubmit  ted  in  tho  form  pre 


U  tho 

tho  queBtionnoiro  filed  for 

taxable  period  1021?    

itting  forth  the  poniculars  in  which 

aadn  a  part  of  this  rt'turti.     If  there 

ipleto  Bchudule  of  BUch  changes 


TablcB  3  and  6  of  tho  quivitionnai 
If  there  are  companies  other  than  thoae  covc-ftHi  by  tho  queationnairo  for  1»20  or  prior 
yeara  which,  appfpngthe  te«tjicontaine<l  iu  questions  11,  12,  or  13,  may  havo  comn  into 
the  affiliated  group  since  1020,  a  questionnaire,  Form  819,  is  required  for  the  entire 
group  for  the  taxable  period. 

VALUATION  OF  CAPITAL  STOCK. 

15.  What  was  tho  fair  valuo  of  tho  total  capital  etock  of  tho  corporaUon  ts  determined 
in  the  last  asBeasment.  if  any.  of  the  capital  Btock  tax7  $..22.gQ.Q.:.P.Q.  Dat«  of  tlmt 
asaesBment iJine^JSg^ J,92  . „. 

PREDECESSOR  BUSINESS. 

16.  Did  the  corporation  file  a  return  undor  the  same  name  (or  tho  praceding  taxable 

period?'  .„,iS.3. If  not.  was  the  eorpofation  in  any  way  i 

continuation,  or  reorganization  of  a  business  or  bosi 

03,"  give  namo  and  oddnMS  of 


BASIS  OF  RETURN. 

17.  Is  this  return  made  on  the  basis  of  actual  receipts  and  disbursements? — *IS- 
Qot,  describe  fully  what  other  basis  or  method  was  used  in  computing  net  income — 

Accrual  


GOVERNMENT  CONTRACTS. 


)  from  which  the  corporation  derived  i 
operations  of  a  claim  board  or  otherwise? 
"yes, "  state  the  amounts  involved  $ 


3  directly  or  indirectly,  through  the 
_  Tf  the  answer  to  this  question  is 
;  whether  or  not  such  amounts 


9  included  in  this  return  ._ 
for  the  additional  i 


was  terminated'' 

dato  entered  into,  dato  the 
and  naturo  of  the  adjuatment. 

AMORTIZATION. 

19.  Has  amortizotiou  been  claimed? 

is  "  yee, "  state  for  what  year  .. Amount  $ — 


LIST  OF  ATTACHED  SCHEDULES. 

n,  giving  for  each  a  brief 

To  _acGpmp_anx,.S.chedul  of  In-  . 

Xent.ory'.^..FprTn...ll26..„„ „ . 

S chedule  A3 :  Gross  Income  from  Operatlona 

Other  thaji  Trad ir,g_or.Jlan^^         

S ched.-a  1  o  A 1 0 :    Gr o 3 3 „ Inc pjne _f i^Qm^JL l_Q.t hjL? 

__. Sourcea 

.Schedule  A 12: 
Schedule  A 13: 


ExpenseSj 


-Q-9^-P-'g-^-g'^J.^o^- °-^-  Officers . 

.Schedule_,A14:_Re£air^ 

Schedule  A16:  Taxes.       


.SchMul.e.  A17;,._  Bad.  Debtg.... 


To  ac compaiijf.. Schedule..  A^^  

"  "   "  '" „" Gi:_Go.odw.lll.i. 

_]] 7 "_ G3_(„cJj._.?X®-TiO]^sjp.wn.er 

Xal^ation  of  Assets  at  Time  of  Acguisl- 

tionhy  CorDorationj; 

Schedule  K:    Balance  Sheets.  


SCHEDULE  K.— BALANCE  SHEETS. 


s  practicable  the  detailB  called  for  below.     ( 
lidatcd  return,  balance  sheets  i 


Otber  aecouats  tnd 


ASSETS- ContJouoO. 


ASSETS- Omtlnuvd. 


UAfilUTIES. 


rrs«r\'ri  (to  b«  detailM). 
:k  ouMandtDC  (lo  ba  eb 
d  uoDvtded  pnflU. 


All  corporations  engaged  in  an  interstate  and  introHtate  trade  or  >)urane8s  and  roporuni 
officer,  may  submit  in  lieu  of  above  form,  copies  of  their  balance  ohceta  prescribed  by  said  i 


10  UabllUr 
liiiicipal  authi 


of  xtM  htkUaco  i1 


Illustration  No.  170,  Page  3  of  Corporation  Income  Tax  Return. 


378 


APPENDIX  C 


Page  4  of  Return. 


SCHEDULE  L.— RECONCILIATION  OF  NET  INCOME  AND  ANALYSIS  OF  CHANGES  IN  SURPLUS. 


»...   _.. 

5 

013 

85.' 

13.  Unallowable  deductions: 

inn 

nn 

3  Ngnttiable  Incoma: 

(a)  Interofc  on  obUEnUonaotthttUnitod  States  and  lb  pMswsIoos 

(6)  Income  and  prolJU  i^xos  paid  to  (he  United  fiUtes.lU  poa- 
sesaions,  or  rorclpn  countli^■^ 

— 

(5)  latcrpit  OQ  ObVigaUoas  of  States,  TerritoriM,  aad  political  sub-' 







{fl  Furniture  and  (lita'rMroddiUonV,  orbettormenu'treaMd  Vj' 

— 

(d;  Dividends    deductible  under  SecUon  33tfa]  6  ol  the  Revenuu 

<e)  B*placamenW  and  renewals — 

(/)  Insurance  prPtniums  paid  on  the  ll/o  olx.ay  officer  or  oisployee 

wheroihccorp.jraHonlsd;rccUvcrindirectlyab«ncricfarr.... 

(fl)  Interest  on  indebi*dn».-a  incutrrd  or  contmuod  to  purchase  or 

carry  obUiri'.i'ii      -  •-:ar\u-  .  fi'i^  Inllcd  StaUs.  the  interest 

Incurred  I'.T                                         ry  3?;%  Notes,  origlaally 



— 

(0  Dlvtdpn.l5  oD  slf«k  otp^rwnal  (wrrico  corpcratlons  ool  of  earo- 

i  ncs  upon  ■which  b.  Federal  Income  Oa  b»  been  imposed 

</}  OtberitcmsorDootuablolDcomedobedDtaUod): 

(., 

— 

-- 

~ 



<*)  *f^'i^|^^  ,':'  '                                          "  "'^^  =»"  =0*  tacluded 

(i)  Addttlonsto  '1            '      !    ,            .|„i  reserves  (or  bad  d«bts 
and  other  c*u*mKUi-.iL  =  ^  l  .. ./« ^i^Ul..udJ; 

3.  ChBfijwnpilnstreserTesrorbaddebls.ltlUniK.SebedtileA.lsnottn  j               | 

1 

1     I 

_._ 

(6) _ 

•    1 

/■>^ 

"     1  "    " 

5.  Total  or  Items  1  to  4,  IncliulTo — 

3 

_.3.!.0l3.ie3.. 

e.  Totol  from  Iwm  14 .„ _. 

Iigoj.oo 

M.  TolMofltcviia 

15.  Dhidends  p-ild  durinc  the  taiahto  period  (itata  whether  paid  In  cub, 
stock  ot  this  compoDf,  or  other  property): 

r 

M)0 

Ttrr 

7.  Net  prodt  for  year  as  shown  by  books,  before  any  adjostments  are 

t 

51913  183 

*,  Surplus  ana  undivided  profits  as  shown  by  halaoca  sheet  at  close  ot 

7 

38fl 

41 

s.  otber  credit,  to  EUTlns  (to be  detailed): 

(c)  Date  paid                   .    ..    .   Character 





— 

(1) 







16.  Other  debits  to  sorplu;  (to  be  detailed): 

f„y        ISii.,    Income  Tax 

..5.21. 

55 

f 

ZlS" 

.521.155. 

1 

17   ' 

1 

12.  Surplus  and  undivided  profits  as  shown  by  balance  sheet  at  close  or 
taxable  period  (Item  lOmlnos  Item  in 

J 

_.12J  72DJ.63.. 

!  .....J LS.S1. 

EC 

SCHEDLXES  TO  BE  FURNISHED  IN  SUPPORT  OF  ITEMS  IN  SCHEDULE  A. 

The  followicg  Dchedulea  muflt  be  furniflhed,  and  thoeo  prepared  on  acparatc  shectfl  ehould  be  firmly  attached  to  thia  return,    Enter  name  and  address  ot  corporation  on  each  eheet. 


SCHEDULE  A2:  COST  OP  GOODS  SOLD.  EXCLUSrVE  OF  ITEMS  CALLED  FOR  SEPARATELY. 
If  engaged  In  a  *"»''•«'  business  In  which  f^o  production,  nurcbai*.  or  ailo^of  merchandise  of  any^Wnd 

aiely  before  Uie  amount  calutoo.  tb"  ictwrs  "C,"  cr  "C  or  il,"  to  indicate  that  iaveaiories  is«  valucd'at  C4tber 

'°'\"ul)Z,"ST^^aX'lii'°"': - - - t .9.Q.7.14...14 


a  being  grouped  Ii 


»  beglnato;  of  year.. 
it  end  olyear 


C  or  V. 


14606.05.. 


....10..5.5.2.0...19. 

..C...Qr..Ji.... ■3.12.6.l.-..?.a 


being  ^rfuped  in 
SCHEDULE  A4: 


COHE  FROM  OPERATIOITS  OTHER  TI 

■  tha  nature  end  amount  of  thn  prindpal  Items  U 

IHTEREST  ON  LIBERT?  BONDS.  ETC. 


...-.7.4.Q5a*41..... 
t  MAim- 


e  period,  attacs  a 
50lidated  rotuxn,  c; 


ETomptions. 
(AEgrcgolo  Principal  Amount). 

5.  Principal  amount 

prineipSfa^ 

3  SSOMO     3  8135  000 

4  S500a 

oxe'Spllons 

'"  ''i"rlhl'S^li"°i"'°°'"^°°' 

""'Cu3!l'Sd','^°'rS 

<e)  other  obUpttioQs  issued  since 
September  1. 1917  (cjceptVic- 

id)  Victory    LiDcrtv     Loon    4}% 

s 

SCHEDULE  AIO:  GROSS  DICOME  FROM  J 
leipect  to  sale  ot  upllsl  aeaMa  or  mlscellaneeaa  li 

iienia  being  grouped  In  ono  ftoiount.  The  loial  ol 
SCHEDULE  A12:  EXPENSES  (eieept  ameunU 
Rubmlt  a  statetr.ent  showing  character  and  an 
lielQC  crouped  In  one  amount.  (For  schedules  to 
tions.  r^'-^^"pbs3io7.  ) 

J^CHEDULE  A13:  COMPENSATION  OF 


:  REPAIRS  (Inclodlos 
duloshoiring 


being  grouped  u 
SCHEDULE  A: 


SCHEDULE  All:  BAD  DEBTS. 


?  SOURCES  (not  Inelndlng  any  amoonl  wlt!i 
of  tbc  principal  Items  Included  herein,  the  minor 

by  insurance  com  panics  see  pace  2  of  Instruc- 

fl,  f  3)  time  deTof  «1  toanch  dntks.M)  shares  nf 
compensation  (or  the  tasablo  period,  and  (S) 

llcma   pnpeily  charseabia  to 

Lions,  paragrapb  8.) 


luppUe*.  overlieed,  and 
ount  of  the  prlnclpil  iioi 


a  salei  or  profrsslonal  services  that  hare 
:scrve,  tumisb  proof  of  the  rcasonablemss 


:  EXHAUSTION. ' 


ludlnf  obseleacence). 
rasrapb  10,  and  S..>cUon  Jj*(e)  7 


J 


Jepreclatlon  ctairsod  ol 


......S.os.o.e.i. /.S.:So\. i.7.J.£ 

-^jiaod /.<?.::r.e\ /.zas. 

..■2:_Q..Cgrm t.C!..JM /Z.S.:2Ji. 

J.OP..O0.Q\..../.:^.^..-.('.S\....J.OO.P.O. 


\ij:r:c!X.o(^i...z.j:.c.:i.-i 


T  In  dotormlnloc  y 


li  computed. 


lalmod  for  the  taxable  period  and  the  b 
SCHEDULE  AlS:  DEPLETION. 

If  a  deduction  Is  claimed  on  acwnint  of  depletion,  sei 

or  addidons  to  ralue  of  physical  8s.«eis  with  explanation  o(  how  depletion  d 


SCHEDULE  A20:  AMORTIZATION 


SCHEDULE  ^ 

ISVESTMB 
In  caso  of  < 

nisbed.uilngn 


Kl).  °^'  0  era       ^ 

•  OR  LOSS  ON  SALES  OF  CAPITAL  J 


o^r.     (Sc^eSKUonZll 
)  MISCELLANEOUS 


l.KlndoIptopmty. 

^S^l 

3.  6ala 
price. 

4.  Cost. 

SH' 

"m'S."' 

■■■^ 

profit 
(or  loas.) 

1 

Total                  

>. — 

value  of  property  received .-._ — 

SCHEDULE  A2I:  LOSSES  BY  FIRE,  E 


SCHEDULE  A2f 

than  a  corporal  lo 


i  should  bo  ■;nbmltted  ^ 


I  PREMIDM  ON  BONDS  SOLD. 

)n  drtTF  the  folfo»ini-''uiforin&ticT)*foi  ciasf.  m  t 


ot  tho  corporatioa  for  which  thia  return  13  mado.  bein;?  Beverally  duly  ewom,  each  for  himBelf  deposes  and  Bays  that  thu  return, 

^v.,..^oB  ....  „..„^^,„..,„6 jnt«,  baa  be«n  examined  bv  him  and  is.  to  the  best  of  hia  knowledge  and  belief,  a  true  and  complete  return  mado  m  good  faith,  for  the 

taxable  period  aa  st^ited,  pursuant  to  the  Revenue  Act  of  1921  and  tho  Regulations  iseued  under  authority  thereof. 


,Dd  subscribed  before  mo  this  . 


(OOtclnl  capacity.) 


Illustration  No.  171,  Page  4  of  Corporation  Income  Tax  Return. 


ALPHABETICAL  INDEX 


Page 

A.  B.  A.  Check,  §  83 113 

Acceptance,  §  92,  ^  i 121 

Account,  Defined,  §12 9 

Accounting,  Defined,  §  iii 139 

Account  Sales,  §  231 240 

Accounts  Payable,  §  28 22 

Accounts      Payable      Account,      §§  163. 

309 172,  280 

Accounts  Peculiar  to  a  Corporation,  §§  265- 

275 256-260 

Accounts  Peculiar  to  a  Partnership,  §  121 .  .    142 

Accounts  Receivable,  §  27 21 

Accounts     Receivable      Account,      §§  161, 

308 169,  280 

Accounts  with  Merchandise,  §  138 155 

Accrued  Interest  Cost,  §  201 209 

Accrued  Interest  Cost  Account,  §  202 210 

Accrued  Interest  Earned,  §  193 205 

Accrued  Interest  Earned  Account,  §  194.  .  .   205 

Accrued  Wages,  §  197 207 

Accrued  Wages  Account,  §  198 207 

Adjusting  Entries,  §  46,  If  4,  §  217 56,  219 

Administrative  Expense  Account,  §  155. .  .  .    165 

Admission  of  a  Partner,  §118 142 

Advertising  Cost,  §  289 273 

Advertising  Expense  Account,  §  290 273 

Advertising  Material  Account,  §  291 273 

Agencies,  §  300 277 

Agent's  Account  with  Principal,  §  301 277 

Agreement   of    Principal's  and  Agent's  Ac- 
counts, §  303 278 

Analysis  of  Closing  Entries 94,  95,     96 

Analytical  Statement,  §  323 300 

Arrangement  of  Accounts,  §  190 202 

Articles  of  Copartnership,  §115 140 

Ascertaining  Cost  of  Goods  Manufactured 

and  Sold,  §  337 321 

Ascertaining  the  Profit  or  Loss,  §  48 77 

Assessment,  §  257 253 

Asset,  §  3 _ 5 

Authorized  Capital  Stock  Sold  at  Time  of 

Organization,  §  284 265 

Auxiliary  Book,  §  171 181 

Balance  of  an  Account,  §12 9 

Balance  Sheet,  §§  50,  219 79,  222 

Balancing  an  Account,  §  61 89 

Bank,  Defined,  §  71 107 

Opening  an  Account  with,  §  72 107 

Bank  Draft,  Defined,  §81 112 

Bar  Graph,  §  346 331 

Bill,  Defined,  §  68 102 

Bill  of  Lading,  §  179 190 

Bond,  §  259 253 

Bonds  Payable  Account,  §  274 259 

Book  of  Original  Entry,  Defined,  §  21 14 

Bookkeeping,  Defined,  §§  8,  1 1 1 7,   139 

Books  of  Account  for  Mercantile  Business, 

§311 283 

Books  of  Account   Peculiar  to  a  Corpora- 
tion, §§  276-283 261-264 

Books  of  Account  with  Special  Columns  .284-292 
Branch  Store  Account,  §  305 279 


Page 

Branch  Store  Accounting,  §  304 278 

Branch  Store  Inventory  Account,  §  306.  .  . .  279 

Building  Expense  Account,  §  156 165 

Buildings  Account,  §  135 151 

Business,  §2 5 

Purpose  of  Organizing  a,  §  137 155 

Business  Forms  and  Accounts  for  Consign- 
ments, §  229 239 

Business  Form  or  Voucher,  §  63 99 

Filing,  §  70 104 

Use  of,  §  64 99 

Business  Letter,  §  177 189 

Business  Transaction,  Defined,  §  7 6 

How  Recorded,  §311 283 

Buying  Expense  Account,  §  151 163 


Capital,  §§  33,  109,  114 32,  130,  140 

Capital  Accounts,  §§34,  122 33,  142 

Capital  and  Capital  Stock,  §  244 249 

Capital  Stock  Account,  §  265 256 

Capital   Stock   Sold   on    Installment    Plan, 

§  287 269 

Cash  Account,  §15 10 

Cash  Book,  §§  43,  168 50,  177 

Posting  from,  §  45 53 

Cash  Journal,  §  353 , 347 

Cash  Proof,  §§  16,  44,  168,  \  \ 10,  51,  179 

Cash  Purchases,  §  38 43 

Cash  Receipts  Journal,  §  355 352 

Cash  Record,  §  42 50 

Cash  Sales,  §  40 46 

Cashier's  Check,  Defined,  §  82 113 

Certified  Check,  §  178 190 

Charter,  §  246 249 

Check,  Defined,  §  76 109 

Check  Book,  §  175 184 

Circular  Graph,  §  348 333 

Classification  of  Stock,  §  249 251 

Closing  Entries,  §  46,  II  4,  §  222  .56,  226,  313-315 

Closing  the  Ledger,  Defined,  §  53 87 

Entries  Necessary,  §§  57,  222 88,  226 

Methods  of,  §  58 ". 88 

C.  O.  D.  Shipments,  §  187 198 

Collateral  Security,  §  319 298 

Collecting  Notes  and  Drafts,  §  185 198 

Combined  Journal  Entry 93 

Commission  Account,  §  236 242 

Commission  Set 245 

Common  Stock,  §  250 251 

Comparative  Balance  Sheet,  §  341  327 

Interpretation  of,  §  342 327 

Comparative  Statement  of  Profit  and  Loss, 

§343--; 327 

Interpretation  of,  §344 327 

Compensation  of  Consignee,  §  227 239 

Consignee,  Defined,  §  225 239 

Consignment,  Defined,  §  225 239 

Purpose  of,  §  228 239 

Consignment  In  Account,  §  234 242 

Consignment  Out  Account,  §  232 241 

Consignor,  Defined,  §  225 239 

Controlling  Account,  §§  160,  307 169,  280 


379 


38o 


ALPHABETICAL  INDEX 


Page 

Corporation,  Defined,  §  240 247 

Accounts  Peculiar  to,  §§  265-275.  .  .  .256-260 

Bookkeeping  for,  §  264 255 

Books  of  Account    Peculiar  to,   §§  276- 

283 261 -264 

Comparison  with  Partnership,  §  242 248 

Income  Tax  for,  §  263 254 

Method  of  Conducting  Business,  §  262. .  .   254 

Method  of  Organizing,  §  245 249 

Opening  Entries  for,  §§  284-287 265-270 

Proprietorship  in,  §  243 248 

Purpose  of,  §  241 247 

Corporation  Organized  to  Continue  a  Go- 
ing Business,  §  286 267 

Corporation  Problems 337~344 

Correcting  Entries,  §  46,  ^  3 56 

Correcting  Errors,  §  189 202 

Cost,  §5 6 

Credit  Defined,  §13 9 

Credit  Bill,  §  180 I93 

Creditor,  Defined,  §  25 21 

Current  Assets,  Defined,  §  109 130 

Current  Entries,  §  46,  ^  2 56 

Current  Liabilities,  Defined,  §  109 130 

Curved  Graph,  §  347 332 

Customer,  Defined,  §  25 21 

Day  Letter,  §  181,  1[  2 193 

Debit,  Defined,  §  13 9 

Deferred  Charges  to  Operation,  §  205 211 

Deferred  Credits  to  Income,  §  210 214 

Deferred  Credit  to  Building   Revenue  Ac- 
count, §  211 214 

Delivery  Equipment  Account,  §  132 150 

Delivery  Expense,  §  297 275 

Delivery  Expense  Account,  §§  153,298.164,  276 

Deposit  Ticket,  Defined,  §  73 107 

Depositor's    Record    of    His    Transactions 

with  the  Bank,  §  78 1 10 

Depreciation,  §§  127,  325 147,  301 

Detecting  Errors  in  Trial  Balance,  §  192  .  .  .  203 
Direct  Method  of  Closing,  §§  60,  365.  .  .89,  359 
Discount,  see  Interest,  Merchandise  Discount. 

Dividend,  §  256 253 

Dividend  Account,  §272 259 

Domestic  Exchange,  §  186 198 

Draft,  Defined,  §  91 120 

Collection  of ,  §  1 85 198 

Effect  of,  on  Bookkeeping  Records,  §  97.    122 

Endorsement  of,  §  96 122 

Use  of,  §  95 122 

Drayage  Account,  §  238 245 

Endorsements,  §§  84,  88 114,  119 

Endorsements  for  Transfer,  §  85 115 

Endorsement,  Position  of,  §  84 , 114 

Entries  for  the  Admission  or  Withdrawal  of 

Partner,  §  125 144 

Entries  Required  to  Close  the  Ledger,  §  57  .  88 

Exchange,  §§  81,  186 112,  198 

Exhibit,  §  321 299 

Expense,  §  31 32 

Expense  Account,  §  32 32 

Express  Money  Order,  see  Money  Orders. 

Express  Shipments,  C.  O.  D.,  §  187,  H  2  .  .  .  200 

Face  of  a  Note,  §  86,  H  i 118 

Fast  Day  Message,  §  181,  If  i 193 

Filing  Business  Forms  and  Vouchers,  §  70.  .    104 


Page 

Fiscal  Period,  Defined,  §  47 77 

Fixed  Assets,  §§  99,  109,  126 126,    130,  147 

Foreign  Exchange,  §  186 198 

Forming  a  Partnership,  §  117 142 

Freight  In  Account,  §  142 157 

Freight  Out  Account,  §  299 276 

Freight  Shipments,  C.  O.  D.,  §  187,  1|  i  .  .  .  199 

Furniture  and  Fixtures  Account,  §  100 126 

Garage  Set 352 

General  Journal,  §§  46,  169 55,  180 

Posting  from,  §  46,  t  5 56 

General  Rule  for  Debits  and  Credits,  §  108.  129 

Goodwill  Account,  §  275 260 

Graph,  Defined,  §  345 330 

How  to  Correct  Errors,  §  189 202 

Income,  §5 6 

Income  Accounts,  §  109 130 

Income  Tax  Return,  Appendix  C 364 

For  Individual,  Illustrated 367-370 

For  Partnership,  Illustrated 371-374 

For  Corporation,  Illustrated 375~378 

Index  to  Ledger,  §  191 202 

Instructions  for  Writing  Checks,  §  77 109 

Insurance  Account,  §  208 213 

Insurance  Policy  Record,  §  174 181 

Interest,  Defined,  §  104 127 

Accrued,  §§  193,  201 205,  209 

Legal  Rate  of,  §  104,  1[  2 128 

Method  of  Calculating,  §  104,  If  4 128 

Interest  Cost  Account,  §§  106,  158.  .  .  .129,  166 

Interest  Earned  Account,  §§  107,  149.  .129,  159 
Interpretation     of     Comparative     Balance 

Sheet,  §  342 _. 327 

Interpretation   of   Comparative   Statement 

of  Profit  and  Loss,  §  344 327 

Inventory,  Defined,  §  49 77 

Inventory  Account,  §§  55,  143 87,  157 

Closing  the 96 

Inventory  of  Consignments  In,  §  235 242 

Inventory  of  Consignments  Out,  §  233 241 

Invoice,  §  66 100 

Invoice  of  Shipment,  §  230 239 

Journal,  Defined,  §  22 14 

Posting  from,  §  23 15 

Journal  Entry  Method  of  Closing,  §  59 .  .  .  .  89 

Journal  Voucher,  §  320 299 

Labor  Account,  §  335 321 

Land  Account,  §  134 151 

Ledger,  §§  14,  170 9,  181 

Legal  Rate  of  Interest,  §  104,  ^2 128 

Letter,  see  Business  Letter. 

Liability,  §  3-  •  -. 5 

List  of  Inventories,  Accruals,  etc.,  §  216.  .  .  217 

Loss,  §§5,  109 6,  130 

Loss  on  Doubtful  Accounts  Account,  §  154 .  164 

Manufacturing,  §  333 320 

Manufacturing  Account,  §  338 322 

Manufacturing  Expense  Account,  §336.  .  .  .  321 

Manufacturing  Process,  §  340 323 

Materials  Account,  §  334 320 

Maturity  Value  of  a  Note,  §  86,  If  2 118 

Memorandum,  §  179 190 


ALPHABETICAL  INDEX 


381 


Page 

Merchandise  Accounts,  §  138 155 

Merchandise,  Defined,  §  17 10 

Merchandise  Discount,  §  147 I59 

Merchandise  Inventory,  §  49 77 

Method    of    Ascertaining    Cost    of    Goods 

Manufactured  and  Sold,  §  337 321 

Method  of  Ascertaining  Profit  or  Loss,  §  48  77 
Method  of  Determining  Debits  and  Credits, 

§  108 129 

Method  of  Forming  a  Partnership,  §  117..  .  142 

Method  of  Maicing  a  Deposit,  §  74 107 

Method  of  Recording  C.  O.  D.  Shipments, 

§  188 202 

Methods  of  Closing  the  Ledger,  §  58 88 

Minute  Book,  §  283 264 

Model  Set 61-74 

Purchases  Journal,  Illustrated 61 

Sales  Journal,  Illustrated 62,  63 

General  Journal,  Illustrated 64 

Cash  Book,  Illustrated 66,  67,  68,  69 

Ledger,  Illustrated 70,  71,  72,  73 

Trial  Balances,  Illustrated 74 

Money  Orders,  Defined,  §  83 113 

Name  of  an  Asset  or  a  Liability,  §  4 6 

Name  of  a  Cost  or  an  Income,  §6 6 

New  Accounts  Required  to  Close  Ledger, 

§54 87 

Night  Letter,  §  181,  ^  4 194 

Night  Message,  §  181,  t  3 i94 

Non-operating  Expense,  §  157 165 

Non-operating  Income,  §  137 155 

No  Par  Value  Stock,  §  252 252 

Note,  Defined,  §  86 118 

Collection  of,  §  185 198 

Effect  of,  on  Bookkeeping  Records,  §89.  119 

Endorsement  of,  §  88 119 

Signing  a,  §  90 120 

Use  of,  §  87 118 

Notes  Payable  Account,  §  103 127 

Notes  Payable  Book,  §  173 181 

Notes  Receivable  Account,  §  102 127 

Notes  Receivable  Book,  §  172 181 

Notes  Receivable  Discounted  Account,  §  310  281 

Number  of  Accounts  in  the  Ledger,  §  14.  .  9 

Numbering  Accounts,  §  324 300 

Office  Equipment  Account,  §  128 148 

Office  Supplies  Account,  §  206 212 

Opening  an  Account  with  the  Bank,  §  72..  .  107 

Opening  Entries,  §  46,  1[  I 55 

Operating  Cost,  §§  31,  109,  150.  .  .  .32,  130,   163 

Operating  Income,  §  137 155 

Order,  see  Purchase  Order. 

Organization  Expense  Account,  §  273 259 

Original,  §  179 190 

Outline  of  Accounts,  Part  I,  §  109. 130 

Outline  of  Accounts,  Part  II,  §  164 173 

Parcel   Post  Shipments,   C.   O.    D.,    §  187, 

\?, 200 

Partner's  Capital  Account,  §  122 142 

Partnership,  Defined,  §112 139 

Accounts  Peculiar  to,  §  I2I 142 

Capital  of,  §  114 140 

Income  Tax  Return  for,  §  120 142 

Method  of  Forming,  §  1 17 142 

Opening  Entries  for,  §  124 143 

Purpose  of  Forming,  §  113 139 


Page 

Partner's  Personal  Account,  §  123 143 

Partnership  Problems 231-237 

Part  of  Authorized  Capital  Stock  Sold  at 

Time  of  Organization,  §  285 266 

Partial  Payments  on  Account,  §  27,  ^  5, 

§28,  If  5 22,  23 

Partial  Payments  on  Note,  §  88 119 

Pass  Book,  §  75 108 

Payment  of  Invoice  Less  Discount,  §  184.  .  197 

Percentages,  §  349 334 

Personal  Accounts,  §  26 21 

Petty  Cash  Book,  §313 283 

Petty  Cash  Fund,  §  312 283 

Postal  Money  Orders,  see  Money  Orders. 

Post-closing  Entries,  §  223 228,  315 

Post-closing  Trial  Balance,  §§  62,  224.  .  .89,  229 

Posting  from  the  Journal,  §  23 15 

General  Journal,  §  46,  1|  5 56 

Purchases  Journal,  §  39 44 

Sales  Journal,  §  41 48 

Cash  Book,  §  45 53 

Power  of  Attorney,  §  318 298 

Preferred  Stock,  §  251 252 

Principal's  Account  with  Agent,  §  302 278 

Profit,  §5 6 

Special,  §  109 130 

Profit  and  Loss  Account,  §  56 88 

Proof  of  Net  Profit,  §§  52,  221 84,  224 

Proprietor's  Capital  Account,  §  34 33 

Proprietor's  Personal  Account,  §  33 33 

Proprietorship,  Defined,  §3 5 

Proving  Cash,  §§  16,  44,  168,  If  i.. .  .10,  51,  179 

Protest,  §  98 123 

Purpose  of  Bookkeeping,  §§9,  10 7 

Purchase  Invoice,  Defined,  §  66 100 

Purchase  Order,  Defined,  §  65 99 

Purchases  Account,  §§  17,  139 10,  156 

Purchases  Journal,  §§  38,  166 43,  177 

Posting  from,  §  39 44 

Purchases  on  Account,  §  25 21 

Purchases  Allowances  Account,  §  141..  156 

Purchases  Discount  Account,  §  148 159 

Purchases  Returns  Account,  §  140 156 

Radio  Set I37 

Receipt,  Defined,  §  69 103 

Reconciliation  of  Bank  Account,  §  80 in 

Recording  Transactions,   §§  19,  24,  37,  46 

II,  15,  43-     55 

Red  Ink  Method  of  Closing,  §  365 359 

Relation  Between  the  Partners,  §  116 140 

Relation  Between  the  Two  Reports,  §  52. .  .      84 
Relation  of  Consignor  and  Consignee,  §  226  239 

Requirements  of  the  Individual,  §1 5 

Reser\'e  Accounts,  §  127 147 

Buildings,  §  136 152 

Delivery  Equipment,  §  133 150 

Doubtful  Accounts,  §  162 171 

Office  Equipment,  §  129 148 

Store  Fixtures,  §  131 149 

Retirement  of  a  Partner,  §  119 142 

Rule  for  Debits  and  Credits,  §  108 129 

Ruling  Personal  Accounts,  §  27,  If  4 22 

Ruling  Profit  and  Loss  Accounts 92 

Salaries   in    Selling    Department   Account, 

§  292 274 


382 


ALPHABETICAL  INDEX 


Page 

Sales  Account,  §§  i8,  144 10,  158 

Sales  Invoice,  §  66 100 

Sales  Journal,  §§  40,  167,  354 46,  177,  352 

Posting  from,  §  41 48 

Sales  Allowances  Account,  §  146 158 

Sales  Discount  Account,  §  159 166 

Sales  Returns  Account,  §  145 158 

Sales  Ticket,  Defined,  §  67 102 

Sales  on  Account,  §  25 21 

Schedule,  §  322 300 

Selling  Expense,  §  288 273 

Selling  Expense  Account,  §  152 163 

Shipping  Order,  §  179 1,90 

Shipping   Room   Material   Account,    §  206, 

note 212 

Sight  Draft,  Defined,  §  93 121 

Signature  Card,  Defined,  §  72 107 

Signing  a  Note,  §  90   120 

Single  Entry,  §§  356-364 353-358 

Sinking  Fund,  §  260 254 

Sinking  Fund  Reserve,  §  261 254 

Space  Required  for  an  Account,  §  14 9 

Special  Columns,  §  314 284 

Special  Journals,  §  37 43 

Special  Profits  and  Losses,  §  109 130 

Statement  of  Account,  §  182 195 

Statement  of  Profit  and  Loss,  §§  51,  220. 82,  224 

Stock  Certificate  Book,  §  279 262 

Stockholder,  §  248 250 

Stockholders'  Journal,  §  280 263 

Stockholders'  Ledger,  §  281 263 

Stock  Transfer  Journal,  §  282 263 

Storage  Account,  §  237 244 

Store  Fixtures  Account,  §  130 149 

Subscribers'  Journal,  §  277 262 

Subscribers'  Ledger,  §  278 262 

Subscribers  to  Capital  Stock  Account,  §  267  257 

Subscription  Book,  §  276. ; 261 

Subscriptions    to    Capital    Stock    Account, 

§268 257 

Summary  of  Chapter  I 7 

Summary  of  Chapters  H,  IH,  IV,  and  V. .  .  59 

Summary  of  Chapters  VI,  VIJ,  and  VIII ...  97 

Surplus,  '§258 253 

Surplus  Account,  §  271 258 

Telegram,  Defined,  §  181 193 

Terms  on  Invoices,  §  183 197 

Time,  §  104,  If  3 128 


Page 

Tracer,  §  179 191 

Trade  Acceptance,  §§  94,  315 122,  296 

Purpose  of,  §  316 296 

Accounting  Procedure,  §  317 297 

Trading  or  Income  Accounts,  §  109 130 

Trading  Account,  §  339 322 

Transaction,  §7 6 

How  Recorded,  §19 11 

How  Represented,  §  176 189 

Transactions    with    Notes    and    Accepted 

Drafts,  §  loi 126 

Traveling  Expense  Account,  §  293 274 

Treasury  Stock,  §  254 252 

Treasury  Stock  Account,  §  269 257 

Treasury  Stock  Donated  Account,   §  270..   257 

Time  Draft,  §  92 120 

Trial  Balance,  Defined,  §  20. .  . 12 

At  Close  of  Period,  Illustrated 74,  218 

Final,  §  218 221 

Of  Totals,  Illustrated 12 

Of  Balances,  Illustrated 12,     74 

Post-closing,  §§  62,  224 89,  229 

Turnover,  §  326 301 

Unissued  Capital  Stock  Account,  §  266.  .  .  .  256 

Unissued  Stock,  §  253 252 

Use  of  Business  Forms  and  Vouchers,  §  64 .  99 

Use  of  Drafts,  §  95 122 

Use  of  Notes,  §  87 118 

Value  of  Stock,  §  255 253 

Value  Received,  §  13 9 

Value  Parted  with,  §13 9 

Voucher,  see  Business  Form  or  Voucher. 

Voucher,  §  350 345 

Voucher  Payable  Register,  §  352 347 

Voucher  System,  §  351 346 

Warehouse  Expense,  §  294 275 

Warehouse  Expense  Account,  §  296 275 

Warehouse  Material  Account,  §  295 275 

Working  Sheet,  §  327 304 

Preparation  of,  §  328 304 

Copying  the  Trial  Balance,  §  329 304 

Entries  in  Adjustment  Columns,  §  330. . .  306 

Extensions,  §  331 308 

Results  of  Extensions,  §  332 308 

Work  Required  at  Close  of  Period,  §  214.  .   217 

For  Partnership,  Illustrated 218-229 

For  Corporation,  Illustrated 305-318 


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